Thursday, December 4, 2008

Freak out meter

To say this has been a tough market would be an understatement. As I browse the blogosphere I see just an amazing amount of indecision and yes outright fear that we might have another leg down. From a contrary point of view that's probably a good thing.

I think all we need to get a rally going is for oil to bounce. It's funny that last summer high oil was killing the market and now we need oil to rally so we can sustain any upside in the market.

As always human emotions are in control. Back in June and July oil was obviously trading purely on greed with no regard to fundamentals. As always these extremes are eventually reversed and now oil is trading purely on fear, again with no regard to fundamentals.

I do think oil is destined to reverse soon. Actually I know it's going to reverse because nothing just goes straight down forever. At the low today oil was trading almost 60% below the 200 DMA. Let me say that again. 60% below the 200 DMA. That my friends is just incredible. Not even silver or sugar which are both far more volatile than oil have moved that far below the mean. As a matter of fact I don't know of anything off hand that has stretched that far below the average. It's even fairly rare to have an individual stock trade that far below the 200.

The gold:oil ratio is now at 17 barrels per oz. Again levels we've not seen in 10 years.

I'm seeing stories in the media predicting ridiculously low prices for oil. I saw similar predictions for $170, $200 or even $300 oil at the top this summer.

Now for an explanation of the title. I've noticed that very often when I get an uncontrollable urge to sell into weakness it usually ends up being either the exact low or very very close to the low. Today I had an almost irresistible urge to sell all my energy positions. On top of that a lot of subscribers emailed me freaking out about their energy stocks.

I have to ask myself does it really make sense to sell with oil 60% below the 200 DMA? Is oil really going to $25, $20 or $10 in the near future? Does the world really have any other serious alternative to oil?

Just like high prices are the cure for high prices, low prices are the cure for falling demand. With gasoline priced under $2.00 in most areas and under $1.50 in some I have to wonder are we really still seeing demand destruction?