Monday, December 1, 2014

It's the Crude Oil Show

Crude oil is in the news, everywhere, all the time.  The market is now obsessed with crude oil and how it will affect everything from other commodities, to stocks and bonds and currencies.  This is not a demand driven selloff, but a slow building up of excess supply with a strengthening dollar pushing prices lower.  The stronger dollar was the catalyst for a market that was vulnerable to the downside because of the strong oil production coming out of US shale oil plays.

I have never seen a supply driven drop in crude oil prices leading to long term weakness in the stock market.  The US is a net importer of crude oil, lower crude oil prices is a net benefit to the US economy.  If this drop was demand related, it would be something I would be more concerned about for stocks, but it is not.  The lower oil prices will act like a mini stimulus for consumers and it also helps to keep bond yields lower, both benefits to the stock market.  Whatever negative you get from the energy sector is vastly outweighed by the benefits elsewhere.

Watching crude oil, it doesn't look like it is ready to bottom yet.  Crude oil is not like the S&P, it is more like gold, it usually doesn't V bottom.  You will be stuck at this lower range in crude oil, between $60 and $70, for at least another few weeks.  I am much more comfortable selling short than getting long crude oil.  Only extreme dips in crude oil are buyable.  But a few dollar bounce is a raging shorting opportunity.  A bounce to $69 this week would be a good short entry point.

As for stocks, I would be buying dips here, this is a buyable dip because it is based on collateral effects of lower crude oil hurting energy and creating some instability, but it will pass quickly like most dips do.

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