Oil to Bears: You're Wrong
Oil strength appears to be in its early stages as a period of leadership asserts itself in the oil equipments and services industry. Further leadership in price means the negative narrative and bear trade is about to reverse.
Everything popular is wrong.
-- Oscar Wilde
Energy has been a significant laggard since early 2011 as the world became gripped with fear over Europe and a hard landing in China. As the mini-correction of May took place in the equities market, it was the commodity space which took the biggest hits, sending oil sharply lower. Yet here we are and seemingly out of nowhere, oil prices are back at the $90 level. This would seem to be at odds with the negative narrative about global growth and a coming recession. The bear argument over an end to global growth is inconsistent with the sudden rise back up in oil.
I have long argued that gradually rising oil is actually bullish for stocks as much as it is painful for consumers because it forces cost push inflation expectations back into the system. This, in turn, makes money flow out of bonds and into risk assets in a bid to simply keep up with anticipated higher fuel costs going forward. This trend may just be getting started. Take a look below at the price ratio of the iShares Dow Jones US Oil Equipment & Services ETF (IEZ) relative to the S&P 500 (IVV). As a reminder, a rising price ratio means the numerator/IEZ is outperforming (up more/down less) the denominator/IVV.
I focus on the oil equipment and services industry here because it is the area of the energy market most sensitive to oil price expectations. Notice that a sharp V-formation in strength is underway now. This could with hindsight be the start of when global growth hope returns given the sensitivity oil stocks have to the performance of emerging market equities and reflation. Either way, strength here indicates oil is likely to continue to rise alongside other risk assets.
This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter