Wednesday, November 07, 2007

Oil and the Stock Market

Here is a link to Mark Hulbert's latest piece on

Hulbert makes the following thought- provoking observation, one that is new to me: "The nearly universal consensus among the nearly 200 newsletters monitored by the Hulbert Financial Digest, as well as from investment-oriented blogs I read: Stock investors are in denial right now. Investors in the oil market, in contrast, are on solid ground." By this Hulbert means that the advisory and blogging community think the stock market is about to head much lower, while the record oil prices we are seeing just reflect solid supply-demand fundamentals, and that oil is headed higher.

I think this is a particularly interesting observation in light of market action. Oil, gold, and silver have been accelerating upward in what appears to be a parabolic rise. Such rallies can be very profitable for the longs but the problem is that they end without warning and are followed by a very bad drop. Along these lines I want to mention a couple of price levels that I think will prove to be signficant.

The first is the magic $100 per barrel mark in crude. I never believed we would see this level but I was wrong. However, I am willing to bet that the market will take just a peek above $100 and then collapse, probably all the way down to $75. I think $100 per barrel will attract many sellers and will scare off many buyers. Once the market starts downward few people will be willing to step in front of it.

The second interesting level is $850 in spot gold and $873 in December gold. These were the top prices in spot and in the front month contract at the January 1980 top in gold which was followed by a 19 year bear market all the way down to $252. I think the market will take a peek above these levels and then have a big break.

The stock market is interesting for a different reason. Over the past three months it has been battered by lots of bad news from the mortgage and credit markets. Yet it is still trading well above the level of its August 16 low (1370 in the cash S&P and 12,518 in the Dow industrials) and only about 5% below its peak level (so far) reached on October 11 at 1576 in the S&P and at 14,198 in the Dow. This resilience in the face of bad news is a sure sign that the stock market is headed much higher.


Anonymous said...

Given that oil and commodities are now a large weighting in the S&P and are helping to hold the markets up, how do you suppose the market is heading much higher? What will drive it? Renewed strength in financials? Industrials? I must say Carl, your premise is loose. Topping has action associated with it and this market is topping. Buyers walked away in June. I don't rely on newspaper stories for my analysis. Anecdotal evidence and gut feel would have bought you what in 2001 with the same being said about tech? This is the most expensive stock market in history. Much more so than 2000 on a fundamental valuation basis. But, wish you the best!

Oh, one more thing. Hulbert is like a yoyo. One minute he is negative and the other positive. Using his analysis for even short term trading is a fool's game. Maybe you should validate the accuracy of your sources before defining bias.

Anonymous said...

I'm a technically based trader and tend to accept your thoughts on the stock market. It seems similar to the crises of 1997 and 1998.

As you have pointed out, stock markets don't make tops on BAD news. The markets weathered the Asian currency crises of 1997 and the LTCM crisis of 1998 only to make a historic top amidst the NASDAQ dot com euphoria of 2000.

However I'm also a student of history, and have a 100 million mark note from 1923 Germany sitting on my desk. (that maybe bought a loaf of bread)

As I watch the FED print dollars faster than most people can blink, I wonder what's ahead. Sure oil is at $100, perhaps because the Euro's at $1.47, and the Fed just keeps on printing and printing.

The most widely held opinion I've heard is the dollar is finished. Any thought's you have would be appreciated.

Thank you.

Anonymous said...

i have been listening to the radio alot since ive been driving from oregon to southern california to see my daughter and this is something ive been thinking through . when the bull mkt is both gold and oil began there was alot of sceptics in oil . oil above 50 would kill the ecomomy
and oil will go back to 20 .
ten oil got above 50 and the stock market kept rising , the skeptic claimed oil would go back to 40 and yet it kept rising .
the past few days im hearing the oposite , oil going above 150 and a strong move to 200 is now there thinking , there is now no skeptics and hence oil is stalling .there buying the 105
front month calls options . this is very close to a top .
the gold bulls are die hards they have been bullish all along and they are recruiting more and more to there camp and yet the one sided bullish veiw while extreme
has not yet made it to the main stream as the obvious gold going to 2000 yet . i expect the gold mkt as well as the gold stocks to some how hang in there into there seasonal tops in january . as for oil and oil stocks here is something i observed this year in regards to alcoa and the price of aluminum . this also relates to the housing sector stocks ( hgx)
and the housing market .
the comodity tends to top before the stocks . housing stocks topped ahead of the housing sector
aluminum topped ahead of alcoa
so gold will probably top before the gold stocks .
the anaolgy is simple we have te bad news to create an oversold stock market . as things improve
the stock mkt should rise to new heights and yet the fundementals
should not improve to there recent heights . hence the bears get bearish 1 leg to early and as early as 1 to 2 years to early .
on the other side of this .
those that wait for the dip to buy
buy finally after the market has peaked and get stuck holding the bag . the housing market should improve starting next year and those that have missed the past 10 years of the housing market will start buying and get left holding the bag .
and lastly the mortgage mkt has not changed at all from what ive seen . a freind of mine just bought a house with 0 down .
so what we are hearing is not completely what is going on ,
hence the bad news is just that news .
the bear market is coming no doubt it will be a bad one . but we still have a few years left till it even begins .