Stop Blaming Oil!
Better late than never: The market’s overbought condition finally reached the point last week where the buyers became exhausted, leaving the sellers to dominate trading. While a lot of commentators foisted blame on Oil, as well as Interest Rates or even Iraq, we find those rationales singularly unsatisfying: Oil has been flirting with $60 for weeks, Interest rates have been going up for a year, while Iraq has been messy for even longer. Pat explanations for the markets’ daily gyrations rarely ring true to us.
As we noted last week,
Mutual funds were running with bearishly low levels of cash on hand. That’s often the fuel of sustained moves higher, and when they
run out of gas, so too the market. But as we also noted, hedge fund cash is
(anecdotally) at relatively high levels, buttressing our expectations that the
consolidation lower remains well contained.
The issue for resolving this retracement may have more to do
with time than price. After the fast move off of the April lows, the indices
quickly got overbought, but never backfilled. All the while, Bullish sentiment
quickly rebounded; With the benefit of hindsight, we can see sentiment went too
far too fast. That combination of Bullish complacency and a technically
extended market condition is what led to the selling - not Oil, Rates or Iraq.
Indeed, since October 2002, Oil has doubled, and with it the
Nasdaq. The inverse correlation many seem so found of blaming the Market’s woes
upon seems to come and go with such irregularity that we hardly find it
instructive to quote Oil as the basis for the selling.
“Imagine,” we were recently asked “where the Nasdaq would be
if Oil were still at $25 a barrel.” Our answer is “probably a lot lower.” Why? Many of the same factors that have
driven Oil higher have also been driving the Nasdaq upwards: Massive government
stimulation, ultra-low interest rates, and increasing Globalization.
At the present juncture, we expect not so much more downside
price-wise as we do a period of consolidation, as mutual funds refill their
coffers with fresh ammo. Before the sell off began, Nasdaq was way above its 50
day ma; now, its only 25 points off.
We wouldn’t be surprised to see the next equity bottom formed as Oil moves towards $65. Such a peak could correspond with a low in equities, and fit in nicely with our Bear Trap theme. Watch that price, as well as the tech index’ support between its breakout point and its moving average (2000-18) for a good risk/reward entry long point.
Monday, June 27, 2005 | 03:05 PM | Permalink
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» Alternate View on Oil from The Stalwart
The Big Picture: Stop Blaming Oil!The Stalwart has recently spotlighted a couple of possible plays on a drop in oil prices, but there's also an alternate view, elucidated by Barry Ritholtz:Indeed, since October 2002, Oil has doubled, and with it [Read More]
Tracked on Jun 28, 2005 11:25:43 AM
» The trouble with market reporting from Stumbling and Mumbling
Barry Ritholtz hits upon a bugbear of mine - the atrocious reporting of daily swings in stock markets. He says: [Read More]
Tracked on Jun 29, 2005 7:02:35 AM
Comments
Blame Rumsfield since the market really tanked when he made the first officail pronouncement that the US could be in Iraq for up to 12 years.
Then blame Grokster.
Posted by: zgveritas | Jun 27, 2005 3:39:31 PM
Here is a really good piece that in some ways jibes with what Barry wrote:
http://cunningrealist.blogspot.com/2005/06/tipping-point.html
Posted by: David | Jun 27, 2005 4:42:15 PM
Thankfully Rumsfeld didn't mention Germany and Japan where our troops are still there after sixty years (quagmire!), Korea fifty five years, or Georgia (the U.S. one) where we have had troops since 1865.
Posted by: Fred Boness | Jun 27, 2005 4:42:34 PM
On another blog, the question has been what's the next bubble? To me, it's oil. Not that there aren't lots of reasons to see it higher than $20, and it may hit $80, but it is now (the chorus of "price will go down" is now "how high will it go" and with even Cramer jumping in on the oil service guys) into full pre-bubble mode.
So, the question here is how fast does the street cycle into oil (it's just started), and what does that do to the averages?
btw, I see oil up then back to 50, then back up long term. (Last year, when it was in freefall in the mid-40's, I called "60 before 40" and now I'm going back the other way.)
Posted by: fatbear | Jun 27, 2005 4:46:41 PM
on the subject of the mutual fund "ammo" mentioned above:
It seemed to me that this past January the mutual funds never really became re-loaded from the '04 post-election run up. I have no exact figures at hand to back up the following hunch, but my guess is that so much of the money that HAS been going into stocks over the last decade or so, is now going into real estate. People are worried that they will either miss the interest-rate cycle lows, or that they "had better buy now" before they are priced-out of their planned upgrade- or both. Finally, it is no secret how the real-estate asset class has outperformed since 2001, and as an asset, it has become favorable again since the average person thinks he/she understands buying a house more so than a stock, bond, commodity, etc...
Thus, I will be watching the mutual fund flow-data for the first few weeks of July very carefully ( & with very low expectations).
Posted by: HBT | Jun 27, 2005 7:28:54 PM
I can kind of agree that "pat explanations" for daily market gyrations are the standard fare of mass media's need for story lines to match up reasoned causes for desultory events. But I find it equally ludicrous to think that somehow the rest of the investment world (those who fail to read The Big Picture and not "in the know") are dumsh*ts who will fall into an oil bear trap and provide us with the perfect buying opportunity at NAS 2000 -18 and $65 oil.
If only making money in the market was that easy.
But I'm willing to watch and learn.
Posted by: edje | Jun 28, 2005 12:07:38 AM
Barry,
I hate to sound an idiot but (and notwithstanding the "anecdotal" reports of hedge fund cash levels your piece seems to be standing on) why, as seems to be the implication would such h funds be waiting to go long (and thus consolidate the indexes as you say) rather than short?
Posted by: Rawdon | Jun 28, 2005 5:27:10 AM
I thought that Hedge Funds were to blame for everything
Posted by: The Stalwart | Jun 28, 2005 11:26:00 AM
