Thursday Sept 20 2012 pre market Opening in the US 8: 15 AM CST
Put another way, staying long here is a bet that one will be wonderfully omniscient, in a market with the RSI already topped out at 72.22 and with MACD at 1.07, yes one will pick the very moment before the mood switches and all race for the exits.
TMP Wednesday Sept 19, 2012 commenting on GDXJ
My point is that RSI bounces between 30 and 72, it cannot get to 100. Once any indicator gets to or near its maximum top or bo tom the indicator becomes of less and less predictive value. Then one is flying by the seat of ones pants rather than on instruments.
This piece provides various rationalizations for the drop in oil prices.
For new readers I notified all that i exited my long commodity plays on Monday. I posted numerous charts both last weekend and Monday morning explaining the rationale. I also posted an additional list of concerns in response to a reader inquiry. I also offered an Ed Carlson analysis using completely different methods that reaches the same conclusion, Ed's work frankly did not affect my decision but just today I ran across another analyst of some note looking for a top this week.
I believe that telling readers what I am doing with my money is a necessary ethical component of writing a blog like this. Rest assured the analysis will continue, as I said, I may be wrong but I am wrong with money in the bank. later in today's pose we examine that what might be right for one investor is wrong for another, it si all about risk tolerance and picking tops.
We will continue to provide unbiased analysis based on the market internals rather than the news or one particular theory or approach. Like our readers I am looking for the next opportunity.
Having said that, is anyone following the oil market? The entire complex is collapsing. If the bull case for commodity plays is correct oil has no business being $93.
Having said that,
Crude Oil Complex
Over the last four days crude oil has dropped through three moving averages. The entire complex is dropping with heating oil and unleaded gasoline joining to the downside. Do not think that this is a positive, ie, the talking heads on television would have you believe that low oil prices are a good thing. in fact oil prices have a high correlation to stock and metals prices. My Dad worked for an international major oil company, I worked in our family owned oilfield business from 1976-1989, I have continuously written a weekly column on oil prices and the West Texas economy since 1998. And unlike Robert Kennedy jr. I have used lava soap and go jo hand cleaner to remove a good deal of the precious environment from the palms of my hands on many occasions while working in West Texas....
My point here is that if crude oil, a gigantic market, can drop 7% in four days, everything one owns right now can do the same thing. Think about what that would do to recent gains in your portfolio.
Basic truths about the oil market learned over my lifetime
1. Industry oil market professionals are the worst predictors of oil prices.
2. Oil prices bear little relation to supply and demand. S and D might vary 20% over long periods while the oil price can move 5x in six months.
3. Oil prices reflect speculation via zero interest money and exchanges around the world which make this the world's largest gambling casino.
4. Oil prices display a high correlation to stock and metals prices, they bear an inverse correlation to risk off bonds and the US Dollar.
The entire Commodities Research Bureau index is also at least correcting. The thing you have to aske yourself, as we head into the traditional weak october season, well do you feel lucky? is this a correction or the start of a top?
On August 14 2012 we featured this graph showing how various made tops at different times. The effect is to deceive the various participants in the market into not recognizing what is really happening.
The Markets Top Year 2000
Again this is the various markets topping in Year 2000. First the DOW, then the SPX and then the CRB topped, each about three months apart. Like any rationalization it was easy to say well that market may be down but mine is still up, ignoring the overall pattern.
Another famous Wall Street adage is that markets never do the same thing twice. Perhaps this time crude oil tops first, and then stocks make a final frenzied rally. Remember that socionomics tells us maximum mood occurs at the end of a move. The NASD moved up 40% in the last few months of its rally from 1982 to early 2000, and then it was all over when everyone was all in. Admittedly my parallel with Dirty Harry's comment is both an attempt at some humor but at this juncture it is also a good idea to ask if you own stocks past your own sleeping point. Is it really better to stay long 100% all the way to what one hopes will be a top thinking that of the millions playing this game you will be calm cool and collected to either have an order placed ahead of time (for one hundred percent of your stocks) or that you will be glued to the screen and somehow pick a top during the trading day.
How many professional traders at the New York Mercantile do you suppose shorted oil at $100 four days ago?
TMP puts on his College Professon Tam for a Classroom Lesson
While all this may sound like a rationalization for my selling on monday and some of it is, most market letters rarely to never ask readers about their own personal comfort zones. Or as Harry Markowitz put it back in the 1950s, what is your risk efficiency frontier?
Here is the idea in a nutshell.
The investor's optimal portfolio is found at the point of tangency of the efficient frontier with the indifference curve. This point marks the highest level of satisfaction the investor can obtain. This is shown in Figure 3. R is the point where the efficient frontier is tangent to indifference curve C3, and is also an efficient portfolio. With this portfolio, the investor will get highest satisfaction as well as best risk-return combination. Any other portfolio, say X, isn't the optimal portfolio even though it lies on the same indifference curve as it is outside the efficient frontier. Portfolio Y is also not optimal as it does not lie on the indifference curve, even though it lies in the portfolio region. Another investor having other sets of indifference curves might have some different portfolio as his best/optimal portfolio.
As Harry puts it, the investor gets the highest satisfaction at the tangent on the indifference curve
I would note that remaining long past that point is liable to induce sleepless nights and severe stress on our investor. In other words remaining long or attempting to move from C3 ot C2 is perhaps assuming a lot more risk for that return than one can mentally absorb. What is your sleeping point?
Handily Harry provided us with a chart that illustrates my point here. Return is on the vertical axis and risk is on the horizontal axis. Harry's point is that higher returns only come with assuming higher risk, and remember Harry was writing before we had exchange traded options, futures, ETFs, 3x ETFs and such. And when Harry was writing, millions of hedge fund mangers and private individuals could not hit one button and sell or buy millions of shares, they can now. Now my point is that one MUST move further out on the risk axis to achieve that final nose bleed high return as the graph goes parabolic, it becomes a geometric function not an arithmetic one.
Now, as the title of this blog is The Market Perspective, go back to Graph One in today's update. Crude oil, after a final week plus move from 94 to 100 gave it all back in four days. As Art Cashin says, one would have to be pretty nimble to have sensed the impending top, THAT DAY!
It is not difficult to imagine a final spike in these various markets followed by a slump just like in oil, giving back all the gains a few days. So staying long will only work if one can guess the very top. And as we point out the various markets will top at different times making an overall assessment that much more difficult.
The Bottom Line
I believe tops in various markets of 18 year significance lie immediately ahead. I believe the markets will exhibit final parabolic like highs. As that happens it becomes increasingly difficult, note oil in the first chart, to sense a proper exit. So the last few percent gains can evaporate quickly as my TLT puts did Monday. That is fine for the modest investment in the puts which still made money. That may not be so fine for your entire portfolio.
After all sorts of frantic gyrations, it may well be that the markets post election just like post election in 1972, settle into a long protracted boil the frog so slowly he does not notice. From 1973 to 1974 post election markets declined 50% as measured by the DJIA. Since markets crashed in 2008, a long slow decline seems the best way to fool the majority of the participants.
This morning stocks oil gold off modestly while bonds and the Dollar are firming.
Thanks for reading TMP we should have a most interesting time between now and the election.
This chart shold not need any comnent, your road map for what lies immediately ahead!