We revisit commentary we published in 2015 regarding the late-2014 oil price crash and review why, at that time, we believed oil prices could stay at depressed levels for a longer period than most expected. Additionally, we advise avoiding two Energy sector segments: companies with high balance-sheet risk, and Energy Royalty Trusts.
Bear markets need a “hook”—some sort of misdirection that keeps the majority hoping. Our work suggests a primary bear market is underway, and we fear oil is this bear’s hook…but the problems run deeper than oil.
As expected, our VLT Momentum algorithm triggered a “low-risk” cyclical buy signal on crude oil in late October, only the 11th buy signal in the past 30 years. This algorithm was originally designed to identify low-risk entry points into the stock market, but we’ve found it useful with other assets as well.
For more than two years we’ve discussed the supply-side risks to commodity producers stemming from capacity built during the manic “Third Act” of last decade’s Three Act Play in commodities. Commodity-oriented equities have indeed underperformed since 2011, but to date, most pundits have laid blame squarely on the demand side.
Leuthold believes the big depressant to stock market these days is not necessarily potential for rising interest rates or higher inflation, but instead is due to the gray cloud of the Iraq situation. Good news is that U.S. may be starting to extricate itself from the Iraq quagmire, and that could be a very bullish development in June.
We continue to believe the Japanese Oil Patch invasion will develop and the sector continues to look oversold and cheap, with most institutions significantly underweighted. Larry Jeddeloh spent part of November on the west coast, combining a research trip with some client visits. Here are his observations.
From a precise timing standpoint, it may still be premature to bottom guess the oils, but it probably is time for big portfolios to start accumulating. The recent waterfall decline in oil prices is nothing new. A number of similar declines have taken place over U.S. economic history. The future? Very long-term, oil is not a very attractive industry.