Crude Prices: “It’s Unreal!”

By Bill Cara –
The head of the Organization of Petroleum Exporting Countries, called OPEC, gave us the quote of the Day: “It’s Unreal!”
We beg to differ. It is real, and if, as and when crude oil prices go higher, so too does our cost at the fuel pumps.
Analysts widely believe that for every one-cent increase at the filling station, consumers in the U.S. are spending an extra US$1 billion more per year for gasoline. That translates, for the United States alone, into an additional $50 billion revenues annually for the energy sector and a corresponding deficit in consumer spending and investment in other sectors.

Is it any wonder why the public are not buying new automobiles, or driving to Wal-Mart to satisfy their incidental spending habits?
Wal-Mart (NYSE: WMT) is looking a little weak here at $53.18, but if it drops off again, to the $51-$52 range or hopefully lower, it is a definite and prime candidate for purchase by long-term oriented investors.
By the way, if you look closely at the Daily data chart for WMT, you will note that the short-term cycle bottomed the day I wrote the article, A Time To Look At Department Store Retailers. In that blog, I said that the weakness was due to other factors than from the stories coming out of Wall Street. It was obviously caused by investors selling, and I believed then it was time to have a new look because the STO and RSI technical indicators were pointing toward a rally at the end of June. And they did rally, as we saw with both Wal-Mart and Target (NYSE: TGT).
I also wrote a major article on Wal-Mart on May 14, called Wal-Mart is for Babies, Thankfully. In that article, with WMT at $55.25, I said to hold off purchases, but over the near-term the price would be attractive in the 51-53 range. Well, early in July WMT traded at $51.50 before hitting a recent high of about $54.20 on July 29. That 5.25% move in the space of two or three week’s, represents the difference between a good trading decision and a bad one.
A 5% move might not appear to be much for a single trade but when you have many of them over the year and the years, these percentages add up.
At some point, my readers are going to say, collectively, thank you for telling us to ignore Wall Street (which I say is a disruptive, misleading force) and instead to focus on technical indicators like Stochastics and Relative Strength Index. In combination with a focus on the macro picture, and an understanding of sector rotation, these technical tools are invaluable to your search for trading success.
This weekend, I was reviewing chatroom talk by traders and was amazed at how specific and detailed some of these discussions are. People whom I presume are fairly inexperienced are, I think, deluding themselves by thinking that some obscure technical tool is going to make them gazillions.
Over years in the securities industry, working for some of the biggest firms in the business, I would watch some of my peers do the same. In the end, they burned themselves out, after blowing their capital and that of their clients.
Any technical indicator is just that: it is an indicator. It is not a proven system. They are like trees in a forest. Your focus has to remain on the forest.
This morning the New York futures price of Light Sweet Crude hit a 21-year record of $44.24 per barrel. That’s a 40% increase in five months, from a level that, at the time ($32), had been considered “high”, and that’s a process called inflation.
As a direct result, consumers are now spending less and economic growth is slowing. That’s called stagflation. But politicians won’t admit to the word because, for stock markets, it is a very bad word.
OPEC is defined today as a “Global organization dedicated to stability in and shared control of the petroleum markets.” They used to be called price-fixers and gougers, but now they are called stabilizers.
Just like the public does not get any true sense of the reality of a war, despite intense media scrutiny, politicians today force the politically correct definition of OPEC upon us.
None of this makes common sense to investors who wonder why there has not been a pullback in equity prices.
Instead, prices languish; interest in the market dies. Trading is left to a relatively few professional traders to maintain the appearance of order and normality in the market.
The appearance of this order and normality in the broad equity markets is what I find “unreal” – not short-term swings in oil futures prices. I understand the latter.
If I had one vote to explain the reluctance of the broad equity market to collapse it would be one for the Republican Party and their wealthy supporters. I believe that the movers-and-shakers of this political group are in self-preservation mode, doing all they can to sustain high stock market prices, for appearances sake. Any serious decline here would devastate their chances to re-elect the President.
The expression, “It’s Unreal” –- as used by the head of OPEC today — is in fact another con job on the public.
We know that whenever that term is used there is an inference that the phenomenon is to be short-lived. But, if oil prices are setting all-time records at a time when global economies are sputtering, what is to happen when the economy starts to expand quickly, as politicians and economists are prone to forecast?
Rather than say, “It’s Unreal”, it would be more accurate to say, “It’s a new world” and that investors are having a tough time adjusting to it.
Meanwhile, until prices dip and a new stock market cycle begins, the markets are locked in a narrow trading range.
Overnight, the Japan Nikkei 225 was down 0.73% to 11,140. The Shanghai Composite continues to get beaten up, closing down another 0.50% on the day, to 1,366. The Heng Seng in Hong Kong was up 1.28% to 12,357 and the Taiwan Weighted index was up 0.31% to 5,367. So the Far East markets are also “mixed,” as they say.
The U.S. 10-year T-Note has been in a rally since mid-May, now extended, so the U.S. Dollar has been stronger than expected and interest rates that had been expected to rise have stayed low. That scenario might be ready to change now and, if so, that situation in particular bears watching.
Any pullback in the U.S. bond market here would likely be accompanied by lower equity prices. If, at this point, you are betting that bonds can continue to rally, as opposed to say oil prices falling, you are probably putting your money on the wrong horse.
Speaking of horses, this morning we got the word that Smarty Jones, perhaps the fastest racehorse ever, has been retired to stud because of continued ailments. This is such a shame for his fans, although in the breeding shed he is certain to make some new ones.
I wish, when all of us face poor health, we could look forward to such a pleasant fate. It doesn’t seem “real”.
Source: Trader Wizard

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