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When The Easy Trade becomes Dangerous
Author: Bob Lang (info)
Website: http://trade-mentor.com
Posted: July 6th, 2008 at 12:38 pm EST
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It seems the most obvious trades in the market recently has been long energy and the like, while being short financials, retail, homebuilders and consumer durables. However, signs are slowing in the economy, and at least ONE side of this trade may start faltering. Don’t get me wrong. This paired trade has been a winner for weeks if not months. Some energy-related sectors are multiyear breakouts, and even with a recent correction…that hasn’t changed. But one thing that concerns us is the crowded trade…those piling in too late and waiting too long, while the low hanging fruit has already been picked. If you’ve ever been in a crowded room, the air gets thin and you start looking for a way out so you can breathe.
Is it All About Oil?
Oil near $150. Whew, who would have thought? Crude is up over 100% over the last twelve months, and that is on top of a big rise the previous year. Nothing is stopping this freight train, either. Very strong demand from overseas countries are offsetting the softening demand here in the US. A report released Tuesday estimates worldwide demand for oil to increase from 87 million barrels a day in 2008 to 94 million barrels a day by 2013. With that estimate was no projection of supply increases or ‘found oil’. Stunning! As the potential for the Western World to drop crude demand, developing countries are likely to pick up the slack…and then some!
Technical Factors
Some very reliable support levels have fallen by the wayside. We note that ‘testing’ lower levels has occurred without the accompanying sentiment. In other words…where is the fear? The VIX still portrays a sense of complacency relative to where the market is at….last time down here the VIX showed a massive 37% level, which sparked action from the Fed. Today it’s near 26…a somewhat high level, yet not showing the capitulatory effects. Even worse, the equity put/call ratio still hovers at lower levels…startling that a huge drop from May (call it 15% in most cases) has not caused a herd of put buyers.
Where is it Really Safe?
That’s a tough question, but in a bear market…CASH is usually pretty safe. Bonds have rallied somewhat but with the spector of higher rates on the horizon, there probably is not much value here. How low will rates go amid an inflationary environment? The question is not if but when the Fed raises rates…and who wants to long bonds when that starts to happen? Some of the commodity-related stocks have been taken to the woodshed lately. Save for oil, these names have been hit hard. Probably the best thing is to watch for reversals in the stronger groups and perhaps a big washout. In bear markets, we know there are sharp, upside moves. Just because everything has been tossed out the window doesn’t mean it’s time to step in and buy.
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Bob Lang, Economics, Investing, Oil, Psychology, Stock Market, Trading
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