____________
Why has the broad market struggled to break higher over the past seven or eight sessions? Is it due to technical reasons (v-shaped bounce off of 1249 on the S&P 500 into overhead supply at around 1332)? Is it because of the recent spike in the price of crude oil? Because the ECB raised rates? Because Japan has a major earthquake every week now? Because of continued tensions in the Middle East and Africa? Or maybe because every single major hedge fund manager in Greenwich and Manhattan were all served with divorce papers last week, putting them in a sour mood?
The financial news media love to assign a daily narrative to price action in the markets, but the struggle between correlation and causation on Wall Street will be an omnipresent one. We are dealing with the aggregate human emotions of millions of market participants on a daily basis, and trying to pinpoint exactly why the market is up or down on a given day usually amounts to nothing more than witty banter, at best, and money-losing hubris, at worst. Obviously, the job of the financial media is to report on the markets, but as a trader you have to constantly fight the urge to simply acquiesce to their reasoning.
In the case of crude oil, there has been plenty of speculation (pun intended) about the precise “tipping point,” where crude become so expensive that equities can no longer ignore its negative impacts on consumers and most businesses. I wrote a post last week where I said that $120 seemed to be a line in the sand, but the reality is that I will let the price action dictate to me what that tipping point actually is.
Going back to 2008, we can pretty clearly see that equities, particularly energy stocks. stalled out and rolled over weeks (in some cases months) before crude topped out at $147 a barrel. I can vividly recall traders aggressively buying energy stocks to no avail, as crude mached higher on a daily basis amid CNBC’s “Black Gold” banner on the top of the screen, following crude’s tick-by-tick fluctuations. Indeed, those traders who bought energy stocks simply because crude was going higher were in for a rude awakening over the next few months, especially if they did not have the discipline to cut losses.
The bottom line is that Mr. Market is the ultimate arbiter, and if you ignore his messages then you are doing your portfolio a disservice. A rising crude oil price is no reason to suddenly metamorphosize from a trader into a macroeconomic expert, or worse yet, an economist.
____________
____________
____________
As always Chess you are the voice of reason – you are my constant reminder that only price action pays and everything else is noise. Great read, thanks for sharing.
thanks
NO $WNR for you?
read the post again-not at all what I am saying
Its going to be fun riding the exponential move up though. Options on a tight leash.
Good plan.
Nice post. Take it easy on the economists though. Some of them are good traders/investors. My rules are quite simple. I never take trading/investing advice from an economist, and I never take economic policy advice from a trader/investor.
I know I’ve said it many times, but thank you for your work in 12631. I’ve been through a really rough patch the past couple of months, and the 12631 has been like the keel on the ship. The accounts were tossed about, but they barely took on any water, and now they’re back on course. Thanks again.
Thanks.
Plenty to think about there, thanks.
OT, but you started it, choose your own adventure books were my favorite!
http://economicdisconnect.blogspot.com/2010/10/swords-sorcery-magic-fantasy-yeah-i.html
Wizards and Warriors, who can forget:
http://4.bp.blogspot.com/_MVLFO6wd5Qg/TMDYjXoYn0I/AAAAAAAABPY/Qg5e_pYN2uA/s1600/falcon+war.jpg
Yes, I just LOVE how the talking heads on CNBC assign reasons to what has already happened, without anyone having any way to (dis)prove their ideas – that’s GOT to be the best job in the world, eh? Make up reasons for what happened, without any consequences if you’re totally wrong…
I remember this one time the market dropped suddenly and in a dramatic fashion, and the “reason” given was that the “investors” were very much spooked by all the big problems in European credit, or something equally serious and somewhat permanent. Then the next day, the market rallied back up and higher. So what happened? The “investors” slept on it, and realized that all those problems which were so dire and foreboding the previous day weren’t a factor anymore?
Geeze… 🙂
“A rising crude oil price is no reason to suddenly metamorphosize from a trader into a macroeconomic expert, or worse yet, an economist.”
Great advice, each chart stands on its own and correlations work until they don’t
Agree with your point about oil price vs. energy stock price. But on the other hand the energy stocks performance is more correlated with rig counts, especially in the case of OIH.
Rig counts pretty much peaked in 3Q 2008 which is right in-line with the stock price peak. Rig counts are still in an uptrend at the moment. I don’t think we’re quite to the rollover point just yet.
I actually agree. I am not making a bearish call here so much as more of a philosophical piece.
The rig count peaked at 4,530 in 1981. The record low of 488 was in 1999.
http://www.businessweek.com/ap/financialnews/D9MFKNB00.htm
NIce
You also had very limited directional drilling technology back in 1981. Meaning it took a lot more rigs to reach the same number of pay sands compared to today. It’s not very useful to compare rig counts from the early 80’s to present.
But you can get some perspective by following the trendline on shorter time scales. I’m probably confusing things here but what I’m trying to say is examine time from “peak-to-peak”, amount of time with somewhat flat counts in past cycles, etc. Don’t get too focused on the absolute numbers.
“A rising crude oil price is no reason to suddenly metamorphosize from a trader into a macroeconomic expert, or worse yet, an economist.”
Everyone is talking Macro now so good point. Ignore that shit and stick to the charts (not Chess, everyone else that is flipping their strategies around and creating fresh biases).
Excellent. Thanks.