“Long energy + Short consumer discretionary” – The pairing trade combination that is currently popular on Wall Street

A new sector pair trading strategy is emerging on Wall Street, with the "long energy + short consumer discretionary" combination replacing the dominance of technology stocks over the years, becoming one of the most attractive sector trades currently.

Bloomberg macro strategist Simon White recently wrote that, driven by a rebound in oil prices, U.S. energy stocks have risen over 20% this year, outperforming all other sectors including technology stocks. Meanwhile, investors are shorting the consumer discretionary sector, which includes non-AI core companies like Amazon and Tesla, as well as traditional retail stocks.

Weak retail sales data in December raised concerns about consumer health, and after toy manufacturer Mattel issued weak earnings forecasts, its stock price recorded the largest single-day drop since 1999, further dampening market sentiment.

Data shows that the short interest ratio for consumer discretionary stocks has increased more than that of technology stocks, while the short interest ratio for energy stocks has dropped to near its lowest level in nearly a year. Analysts believe this trend reflects a reassessment by investors of the prospects for different sectors and a shift in preference for physical asset allocation in an inflationary environment.

The Dominance of Technology Stocks is Shaken, Energy Stocks Strongly Rebound

For a long time, technology stocks have outperformed other major sectors in the U.S., but this dominance is no longer secure in the minds of investors.

Artificial intelligence (AI) companies are investing heavily in infrastructure, with investment levels comparable to the GDP of small to medium-sized countries. This high-risk gamble has led to a strict examination of the business models and profit margins of software-as-a-service (SaaS) companies, as AI is turning code production into a nearly costless commodity.

In contrast, while the energy sector was previously hindered by profit declines due to low oil prices and reduced allocations from large investors due to ESG (Environmental, Social, and Governance) restrictions, the situation has now reversed.

While AI aims to reduce intelligence costs, its hard constraint is the processor's greedy demand for energy. This year, driven by a rebound in oil prices, U.S. energy stocks have risen over 20%, not only outperforming the market but also directly surpassing the technology sector.

Shorting Targets Shift: From Technology to Consumer Discretionary

Despite the disruption risks and massive spending pressures facing the technology sector, directly shorting tech stocks is still seen as a "brave" trade, as the industry is filled with unknown rapid disruption capabilities.

Therefore, investors have not heavily shorted AI developers but have instead focused their shorting targets on consumer discretionary stocks.

This category includes not only non-pure AI developers like Amazon and Tesla but also standard retail stocks. Market sentiment has been hit by specific data:

December retail sales performance was weak, raising concerns about consumer health; Mattel, due to its weak earnings forecast, saw its stock price record the largest single-day drop since 1999, further undermining market confidence.

Data shows that the current short ratio for consumer discretionary stocks has increased more than that of technology stocks, while the short ratios for energy stocks and consumer staples have dropped to their lowest levels in at least a year Analysis indicates that as long as concerns about consumer health persist, technology companies will continue to damage the health of their balance sheets with large-scale investments, and the demand for physical asset allocation will continue to increase in an inflationary environment where the government maintains large fiscal deficits, there is no reason for the emerging sector trends this year to change direction quickly