For those that enjoy warm sunny days and bright blue skies, the market rally over the last two weeks has been a very welcome tonic. Of course with the weather, a storm can blow in at any time putting an end to the euphoria. Same too in the market, and this time around it will be very easy to see those storm clouds well in advance of appearing.
It’s all about oil and oil only. For this market to continue moving forward instead of backward, we need to see oil continue its descent.
It is that simple.
The market is so tightly correlated to oil prices, nothing else matters. When prices rose to nosebleed territory of $150 per barrel, stocks had no chance. The vice grip of prices that high prevented any sort of momentum in stocks irrespective of the credit crisis.
Think about it.
During a week when we saw huge write downs from Merrill (MER), two more bank failures on the west coast and news that home prices and sales were still dropping stocks rallied.
The reason for the rally was due to the precipitous fall in oil prices. Stockpiles of both gasoline and crude rising provided market participants ample evidence that demand destruction in U.S. consumption is quite real.
So give yourselves a big pat on the back U.S. consumers! You did it. You beat those big bad oil speculators by conserving on your usage and bam–down goes the price of oil.
I knew you could do it!
But now here comes the tricky part. You need to keep doing it and doing it in a major way. I recently wrote that if you want your portfolios to rise in value, then the best thing to do would be to take on the oil profiteers head on (see, “The U.S. Searches for Self“). Simply don’t use the stuff. Take fewer trips to run errands, drive slower, carpool, and work from home are just a few of the ideas that I, and many others, have suggested to wean us off oil dependence.
Even the great oil man, T. Boone Pickens, joined the battle by becoming a cheerleader for alternative energy. He backed up the cheers with an open pocketbook making a very powerful statement. That statement does not fall on deaf ears. It is going directly to the hedge fund and institutional managers that have billions of dollars invested directly and indirectly in the oil markets (see also, “The Oil Stock Pyramid Scheme“).
As quickly as these managers can be swayed to the bullish case they can be swayed to the bearish case. We are currently seeing that happen today. Honestly, I know a thing or two about big money managers. More importantly, I know how they think. Most of them have less courage than the Wizard of Oz’s Cowardly Lion! They are a gutless group most of them and taking risk is not in their make-up. That may seem strange, but it is true. They are looking for the easy money and most of them will follow the crowd. They are nothing more than lemmings.
If the pro’s in the oil markets (and very well paid economists) state that oil prices are way above fundamentals, then investors should take note. That big sucking sound you hear is the exodus of institutional money leaving the oil futures market. It is all so predictable, but there is risk.
That risk is that if conservation efforts fail to stick, the fast money will return and oil prices will rise. But we’ll have to keep fighting the battle.
Yesterday for example, oil prices rose by more than $4 on news that supplies actually dropped for the week. The dimwitted used this as an excuse to buy some long positions in oil, but fortunately volume was weak.
It is also true that weekly numbers on supply tend to be very volatile and unpredictable, but we should view the reaction in the market as a reminder that we need to be diligent with our daily behavior. Eventually, those big money managers will get bored with the oil trade and move on to some other victim. For now though, our fate in the stock market is directly tied to what happens with crude.
If we want stocks to rise we need to keep cutting our usage of oil. If we do that we may very well find that we end this year with positive returns in our portfolio.
This article was written by Jamie Dlugosch, contributing editor to InvestorPlace Media. For more actionable insights like this, visit www.InvestorPlace.com.
