So oil is closing in on $100 and maybe it will head higher but, and this is the point, when there is a big move in a thing people tend to project the trend to simply continue indefinitely.This tends to be a behavioral thing. I have written about this before WRT to oil. About a year and a half ago I noted everyone being on the same side of the trade when oil first got to $75.
Shortly after the post linked to above, I was on a radio show in California and the two money managers/hosts very excitedly were calling for oil to get to $100 quickly-again this was mid 2006. These are smart guys they just hopped on a very popular bandwagon which is easy to do.
Last winter when oil went back down quickly to $50 a lot of folks came out of the woodwork calling for $40. Today people are looking up to $150. The next time it goes down people will call for it to keep going down. This repeats over and over with all sorts things. Gold is another one and the dollar too.
This is not a directional call but I would say to not get too caught up with this sort of chatter.
The path that I think supply and demand is on for oil leads me to believe it is the right place to be. If you agree you probably have oil stock exposure too. Oil at $96 today or $76 next month would not change my long term view.
Gold plays the role of a diversifier for me in an equity-based portfolio. It has had a good run, if you own gold for its diversification properties and it has grown too big for your own liking you should sell some. When someone calls for $600 or $1000 that probably does nothing for the diversification angle. The dollar has some fundamental problems that make the case for it to go lower, clearly it could trade higher at anytime for longer than anyone might think but if you think the fundamentals point lower, well you know what you need to own.
This is not helpful for people who trade because obviously comments from the right people help create volatility that you want to see. The dollar has had such a one way trade for so long it seems clear that it will rally (probably just counter-trend but who knows?) fast and big-ish enough to shake out plenty of dollar bears.
The takeaway would be that there is a lot of heat and heated commentary around all of these things and if you describe yourself as long term you probably should not trade off of heated commentary and just stick to simple a simple exit strategy which hopefully doesn't have you trading too often, again if you are long term.
11 comments:
so you think oil is okay, but china is a bubble?
rog.....you are too funny...
....are we trying to sneak up on a discussion of momentum and the psychology of such? My experience has been that it matters.....right up until it doesn't.
Bloviate: To discourse at length in a pompous or boastful manner.
I have a rule: when they wheel out Boone Pickens and $100 oil, oil is getting ready to correct. Don't have enough confidence to put any money at risk based on this rule though.
Oil could crater plummet crash and collapse all the way to $70 or so pretty easily.
Last I heard Steve Forbes upped his price target to $40. Kudlow no longer is calling for $30 but apparently it's still all those darn speculators.
I guess when *they* capitulate you sell?
Roger,
Here is a trading tip for you to expound upon...
The market is down today....its time to panic and sell everything....
go for it, rog baby....
i have been reducing my USO on the way up.
I am going to sell my last 1/3 when/if WTI hits $99 and rotate to UNG. I think UNG has the better risk/reward ratio at this stage yet still allows for exposure to the area.
All I know is that picture of Jed along side todays blog title gave me a good chuckle.
That's not Jed...that's the Heckler in his brokerage office giving sage advise to one of his three clients.
"Granny, I reckon that China is the place to be in now for an old fart like you. Yepper, you need a quick killin' before you up an' croak. 80% in China and 20 in USO will have you movin' to Bevery Hills by spring!"
JS
Dan Dicker had a terrific column on RM. He noted the grand level of speculation in oil. If one were to look at the price of oil, one could construct a pie chart consisting of
~ geopolitical risk
~ USD rise/fall
~ speculation
~ fundamentals (supply/demand)
----------------------------
Dan's point was that there was much speculation. Nat gas (remember Amaranth?) has the same thing.
As we hear, everyone is saying fundamentals, fundamentals, fundamentals. No matter how you spin it...the developed nations are still the biggest users. Oil inventories going lower? Why wouldn't they. Whose going to buy to replenish at these prices?
I agree with the T. Boone comment. Whenever he shakes his oil shaman gourds, I believe that we are near a top---sold to YOU!
And....with everyone recommending oil service stocks over the last year, who is left to buy?
Leisa, i agree, that's why i do not want to wait for the magical $100 to get out of my remaining USO.
I've been holding them since the spring when everybody was calling for $40 and i believe we topped.
I will be shorting USO on the way down AFTER it rolls over and starts falling with a stop right above the ultimate high.
However, I do not want to be completely out of energy and my only other holding in the area is DKA thus the UNG choice.
I remember Amaranth however i believe the dynamics for Natural Gas are different than oil.
For one thing we are getting into the cold weather season where demand for natural gas rises.
Also natural gas has not participated in oil's crazy run. Finally, people do not associate it with the same geopolitical risk.
Of course, i could be wrong on all accounts and that's why the UNG holding will be around 2-3% of my portfolio, no more.
From a technical perspective, oil is most likely way overbought and overextended presently.
Having said that, it sure seems to me the "consensus view" is that the current oil price is primarily being driven by "speculators" and geopolitical risk and not supply/demand factors.
I listened to the CHK conference call this morning (I am long CHK), and the CEO McClendon (arguably one of the smartest guys in the energy business) had some comments on oil prices.
He basically said the oil market is doing what it is supposed to be doing which is raising prices to send the signal to reduce demand, and so far demand hasn't been impacted by higher prices, so prices will keep marching higher until they finally start resulting in demand destruction. I'd highly encourage listening to the call to get his entire perspective on the issue.
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