Short $XLE

1) I don't like to be contrarian as chances of getting it wrong is normally quite high (tho it really pays when you get it right). However, I am starting to see a good setup for a short in $XLE which is why i put it on last friday.

2) Throughout this carnage in equities and bonds, oil has been the main culprit; higher oil price = higher inflation. And as such we saw $XLE outperforming all the other sectors YTD (+58%) and was basically immune to the bear market pressure.

3) This is obviously quite different from other "bear cycles" where energy tends to lead on the downside as seen in the 2018 selloff (-30%) and also march 2020. For reasons I wouldn't go into here, oil supply/demand is currently quite skewed and will likely remain that way.

4) So why short $XLE? Firstly, oil prices benefit from the supply shortages, but if the economy does crack like the rest of the sectors are pricing in, demand will follow suit in the next 6-12 months. This might or might not follow with lower oil prices, but will certainly...

5) ... follow with lower revenues for $XLE. To add icing on the cake, biden continues to paint $XLE as evil, "earning more money than god" to support his own agenda. We also have China's slow resumption to normalcy/buying russia oil keeping future demand from $XLE companies low.

6) Looking at positioning, overweights in $XLE have obviously printed this year. Profit taking and rebalancing of that overweight position (which further ballooned 60% from ytd gains) into end of this quarter will help with some selling flows.

7) Also the last doubt I have is that can energy really stay immune throughout this entire bear market cycle if we drop into recession? I am not sure.

8) From a portfolio construction perspective, some $XLE shorts here would also pair well with puts on Indices. If this trade is wrong and $XLE rams to new highs, it is likely that we see a world with $150 oil, and $SPX/$NQ would be a lot lower... Good luck.