Saturday, June 28, 2008

Watching Coal

I'm currently watching the coal stocks as a sign for when energy is going to succumb to the bite of the bear. Once the coal index breaks the trend line then I suspect the party will be over in the energy sector.

At the recent high the coal index was 76% above the 200 DMA. It's pretty rare that an index can push more than 60% above the 200 DMA. In 2000 the Nasdaq only managed to move 57% above the 200 DMA. That was during the greatest bubble in history. Just goes to show you how incredibly stretched the move in the coal stocks has become. These kind of moves occur when dumb retail money finally moves into the sector.

As most of you know I've pointed out many times in the past that a spike of 100% or more in oil prices within a years time has led to a recession 100% of the time.

Let me also point out that the recession has crushed demand and led to falling oil prices 100% of the time. This never fails and I guarantee it's not going to fail this time either. This is not going to be the one time in history where "it's different this time".

I know the energy bulls will point out that the fundamentals are supporting this parabolic rise in oil. While I am in the peak oil camp I also know that there are two components to a supply and demand imbalance.

As long as the world is growing then yes we are using more oil than the world can produce. What the bulls want to ignore is a worsening global recession. Almost every stock market in the world is telling us this is a fact.

Unless someone can explain to me how failing economies can somehow continue to increase energy demand then I'm going to have to be in the camp that thinks that the parabolic spike in energy prices is going to end like all parabolic spikes collapse.

Keep in mind that parabolic moves are a sign of irrational human emotions. Fundamentals just don't ever change rapidly enough to justify vertical moves barring a war in the Middle East. The last time I checked there weren't any new wars brewing. Now if I saw a US military build up on the Iran border like we saw in 02 in Iraq then I might change my mind about oils sustainability.

Until that time I think I'll separate myself from the herd piling into the energy stocks.

Here's one of the few truths that you can take to the bank. "When everybody's thinking the same thing then no one is thinking"