Morning Market Thoughts
Good morning. The market looks like it’s going to open up slightly and continue to re-test resistance. If you haven’t watched last night’s Strategy Session, I suggest that you set aside a bit of time to do so. One of the main points in the session was the obvious rotation that’s going on. It’s quite interesting that the S&P and other major indexes are essentially bumping up against a ceiling and stalling (which is different than reversing). The supply at resistance is equal to demand, as old bulls take profits by selling to new bulls. That’s the nature of support and resistance.But if you look at the oil/gas stocks, you’ll see that they are just starting to break out. The actual reason for the breakout doesn’t matter. The only people who get paid for the reason are the analysts who write about the reasons — and they get paid whether they are right or wrong. Nice to be an analyst. The only thing that matters in a quest to make money is what the price of the underlying instrument is doing. If you own it, and it’s going higher, you’re happy. If it’s going lower,…you’re sad. That’s the nature of trading.
I think this breakout is a bit fascinating because the S&P and the Dow 30 both have big energy stocks among their holdings. So the fact that these indexes are struggling (might still go higher — that’s just not what I’m talking about here), and the energy stocks are starting to move, reflects a big shift in money deployment. Simply put, investors want to own energy companies.
This was almost predictable (if you believe in markets being predictable) by one chart: The chart of oil.
Lately, all we’ve been hearing and reading in financial information outlets (I’ll refrain from naming them) is that oil will top out at $50 and probably won’t get above that level in our lifetimes. (Yes, I actually heard one well-known commodities pundit say this). Meanwhile, the trend on the chart showed a straight line from lower left to upper right. Still, conventional wisdom was that oil was at the obvious top of the range. And what prudent money manager would be buying stocks like Halliburton (HAL), ConocoPhillips (COP) or Chevron (CVX) when the commodity they deal in is going to get cheaper, not more expensive? With the knowledge that oil was topped out at $50/bbl, buying energy stocks seems pretty silly to me.
So energy stocks were “underowned”. They consolidated. They didn’t fall because not every investor was aware that oil was obviously not moving above $50 — or they just didn’t believe it. So the energy stocks languished due mostly to a lack of enthusiasm.
Then a funny thing happened on the way to a correction in oil — there was no correction. Instead, oil settled above $50/bbl for the first time since last July…when it was on its way to $26. Now, the smart guys who saw the obvious ceiling at $50/bbl are scrambling a bit. They’re buying energy stocks. You can see it in the charts.
And the cool thing is that you actually knew more than the brilliant analysts wearing the $1,500 suits while looking with admiration at their diplomas from their Ivy League alma mater while standing in their offices in Manhattan. And all you had to do was look at a chart. You could’ve just turned off the TV, started reading the National Enquirer and cruising through TMZ.com and you’d have had better information that market addicts. All you had to do was look at a chart.
Now, I don’t know whether this uptrend in oil will continue. But I’m darned sure not interested in whether the commodities gurus think they will. I want the REAL information.
I’ll just watch the charts.
See you in the forum.
Dan
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