If Blogger is behaving itself today (i.e., not eating my posts), let's see if I can post something I tried to post to you last night. It's especially relevant considering the bounce we're seeing in energy today. Here goes ...
The stock indices are whipsawing to nosebleed levels – while oil and natural gas plunge to stomach-churning depths. We’ve got a good ol’ fashioned market roller coaster on our hands. The trick is to have fun without losing your lunch.
Last week I called for gold to bounce, as it found support at the 50% retracement of its big bull move. And it did … along with silver and some other metals, gold is higher than it was a week ago. But gold’s move higher hasn’t stopped many market talking heads from asking: “Is the commodities boom over?”
Certainly, the uptrend line on the CRB Index is broken, and the CRB Index – a weighted index of 19 commodities – has continued lower even as gold and silver have turned higher. There’s a reason for that: Crude oil accounts for 23% of the CRB, and crude continues to search for support. Including natural gas, the CRB’s energy exposure is 39%! It seems likely that the CRB will bottom when energy finds a bottom.
Indeed, the CRB is very energy-heavy. Using it to gauge a bull or bear market for commodities as a whole becomes problematic.
Take a look at this next chart … you might find it interesting. On this monthly chart, you can see how the CRB Index fell through its uptrend (the green dotted line). And man, it PLUNGED. Now, it has come down to the 38% retracement of its big bull move. This is a common retracement in a bull market … a likely place for a base for the next big move higher.
The next important question becomes, has crude oil found support at $60? Certainly, $60 is the “line in the sand” that some OPEC members (Iran and Venezuela) talk about. Others set their defense line lower at $55.
There are fundamental reasons for oil to go lower …
- BP is restarting production on the eastern side of Prudhoe Bay, which has been shut down since August
- The threat of a production cut-off by Iran is easing.
- The hurricane season has been a bust so far.
- Importantly, there is plenty of product already refined and sitting in storage. As storage fills up, refiners are willing to pay less for crude
On the bullish side of fundamentals, in the most recent week, gasoline demand advanced 4.6% compared to the same week a year earlier, according to the U.S. Energy Department. So, consumers could be a bullish force that will light a fire under oil prices again. We'll see what the energy numbers are on Wednesday.
Psychologically, the bears are out in force. We’ve heard targets of $50 … $40 … even $25 per barrel. There has been a major psychological shift. Traders openly worry there’s another hedge fund out there like Amaranth – a fund that went from up $1.5 billion to losing $4 billion all because of bad bets on natural gas. This negative psychological view could be a bullish force in the market. If funds and big traders have all turned negative, there’s no one left to sell.
Will the CRB bounce here? We don’t know. And 50% of a move (the next horizontal blue line down on the chart) is ALSO a likely target for a pullback. Certainly this should be a volatile time in the commodity markets.
XX Well, that was what I was going to post last night. Today, the commodity markets and commodity stocks are bouncing. I'll explain more about why I think this is happening in issues to
Red-Hot Canadian Small-Caps and
Red-Hot Asian Tigers subscribers. So, stay tuned.
While I might use the phrase "addicted to oil" to illustrate a point, I really don't want a picture of crack-junkie Uncle Sam mainlining to feed his jones.
