Jeez, it just keeps getting worse for energy investors, doesn’t it? The oil price fell another 5% overnight, apparently because of a rise in US inventories. But that’s just a ‘reason’. Prices don’t move that much based on something as commonly known as ‘inventories’.
The oil market is in the midst of a fully fledged panic. And the downward momentum has a lot to do with the financialisation of oil and commodities in general. That is, there is just as much paper demand for oil as there is demand for the real stuff.
Maybe that’s an exaggeration. I don’t have any stats to back that up. But the point is, when speculators want to get ‘exposure’ to oil, they buy a futures contract or some other paper derivative. Sure, you could buy an oil, or oil services company, but where’s the leverage in that?
This is what markets have become these days. Everything is about exposure and leverage. Derivative products are a primary driver of prices. Sure, news that Saudi Arabia wants to maintain production despite weaker prices is not good for the physical oil market. That’s simply excess supply in a demand constrained world.
But is this news enough to push prices down more than 40% in less than six months? Of course not. It’s all about a speculative unwind of positions. That is, paper positions having ‘exposure’ to oil…that no longer want to have exposure to oil.
Does this mean there is an opportunity to take advantage of the lunacy? Maybe if you think you can get lucky on a short term bounce. But you could have easily fallen for that last week or the week before. Oil is just not providing a bounce right now. It will, but if you pick it, it’s just luck and has nothing to do with skill.
Picking a bounce in oil goes against everything my mate Jason McIntosh (the brains behind our latest trading product, Quant Trader) talks about. His mantra is to invest with the trend. That doesn’t mean blindly buying whatever stock is going up. It’s about assessing a number of factors and filters…and not trying to be a hero by picking tops and bottoms.
As well as writing the algorithms for Quant Trader, Jason’s adding his trading touch to my stock ideas in Sound Money. Sound Investments.
I’ve give you an example of how it works. A few months ago, I identified a stock that I thought was overvalued, was facing substantial headwinds, and would head lower. Much lower.
But at the time, the charts didn’t support my idea. The stock was still in an uptrend. Putting out a short sell recommendation was risky. Just recently though, the stock price action confirmed my idea and it was time to act. Here’s what Jason had to say about it (out of consideration for paid-up subscribers, I’m not going to tell you the stock name)…
‘The tide always turns. There’s a natural progression between the high and low water marks.
‘The same is true of stocks…they have a similar ebb and flow. A rising and falling motion that plays out in what we call trends.
‘Picking the turning point is a risky business. More often than not, the shares push on in the direction they were heading.
‘This makes us cautious. Trying to outsmart the market can be costly.
‘We don’t try to pinpoint a high or low. Rather we wait for the market to indicate there’s a good possibility of a major trend change.
‘Shares in XXX are currently showing signs of just that…a shift in the trend.
‘The shares broke below support in September. This was the first sign the pullback from February’s all-time-high was more than a correction.
‘Our view at the time was to wait for a rebound. You see, prices often partially recover after a break of support. This is largely due to bargain hunters buying at the lower prices.
‘Buying a breakdown is a dangerous strategy. Many bargain hunters end up holding a stock that eventually gets a lot cheaper.
‘You can see the brief recovery on XXX’s share price chart. It was a textbook retracement. The shares rallied back to breakdown point before falling back.’
The fall back and break to new lows was our trigger point. The stocks’ poor technical picture matched the poor fundamental outlook. The trend had turned. It was time to act.
Speaking of trends, one of the biggest trends in Australia for the past few decades has been the property market. It’s unstoppable and anyone standing in the way has been run over…me included.
My mate Phil Anderson, editor of Cycles, Trends and Forecasts, would tell me to just get out of the way, and rightly so. But when you’re flat on the road, it’s a bit late for that. So I’ll continue to chip away at the edifice that is the great Australian dream.
Yesterday, the banking regulator APRA announced moves to cool investor activity in the housing market. They want to ensure that investor loan growth doesn’t exceed 10% year on year. It’s close to that right now, meaning some banks might have to pull their head in soon.
Whether this actually does anything to cool the housing market remains to be seen. But I think it will have an impact. The Aussie housing market is pretty much all Sydney driven, with a bit of help thrown in by Melbourne. The other capitals are doing it tough, and Perth is starting to go backwards. (What else should you expect from a terms of trade collapse with Western Australia — and Perth — at ground zero?)
With the explosion of investor loan growth over the past year (investors now account for a record level of total lending), it’s hard to ignore the impact this investor class has had on Sydney (and Melbourne) property prices.
The APRA effect won’t hit straight away. But it should start to make a dent in the speculative bubble in the months ahead. Despite being battered and bruised from calling Aussie property a bubble, I’ll continue to keep my eye on it for you.
For Markets and Money