Crude Oil – Supply Push vs. Demand Pull (This is Not the Bullish One)
There is a bullish impact on supply and demand and there is a bearish one as it pertains to economic output (read growth or incomes). The kind of increase we have seen over the weekend as US policy move to curb Iranian supply is cost push. This is similar to the former Alberta government forcing supply cuts on Canadian producers to force prices up rather than increasing pipeline capacity to increase demand potential for our product globally. It can work for a while and push prices higher, but without higher demand, it is not likely sustainably BULLISH. When it comes to the energy sector, this can lead to stagflation and is not bullish for stocks or the economy, though the initial response can be positive. These breakouts should not be chased except for momentum type traders as they are most likely to fail. Value investors should have been buying with us near recent lows and should now be patient.
You are likely to see several technical calls in the coming days and weeks for a breakout in energy stocks. It can be traded, but it’s not time to invest. The next recession, whenever it comes, will certainly see a demand (push) “bear market” decline in energy prices before we can be bullish and invest in a global economic recovery. For now, bulls should consider themselves more speculators than investors this late in the economic cycle where the catalyst for a breakout is from the supply push side.
We like to look at equal weight indexes in a sector like energy to see what the average stocks is doing rather than the market cap weight where a few heavy weights dominate the sector (as we see in Canada). We can see the Canadian equal weight ETF (ZEO) is approaching the resistance of the falling 200-day average and “pure” technical analysts will likely see this as a bullish event if they are not considering the catalyst. I much prefer the quality assessment of what could be driving price to suggest what the sustainability of such a rally could be. We could easily rally back to recent highs of late 2017 and 2018, but we doubt very much the markets will breakout in a bigger way on a supply push rally. For some, this may be enough of a reason to jump on board, you’ll have to decide that for yourself. It should be no surprise I’m a bit of a growth bear as I see a recession over the horizon and that is never bullish for energy demand.
In the US, the same falling 200-day average on the equal weight index (RYE) is just above the market and can act as a breakout catalyst. Same is true for the market cap weighted XLE. But do not expect the highs of the past few years to break, though we could see a 10-15% rally back to those highs. From a tactical perspective, we’ve had an overweight in US energy (AMLP) in the funds we run and will be reducing exposure into such a rally not buying in to it.
Learn to Sleep at Night in a Bear Market
The previous Investor’s Guide to Thriving tour wrapped up on December 1st 2018. Aptly named “How Long Can a Bull Market Run?” we may have received our answer. The market printed the worst December since the Great Depression – bringing most of the major indices officially into bear market (-20%+) territory. Markets have rebounded in January as they always do after steep declines, but we are likely in the early phases of a bear market where average corrections are closer to 30% and extreme corrections are more than 50%. If this is case, we haven’t seen the last of market volatility and a downward pattern of lower highs and lower lows. Many people are surprised at this phase because it can take some time for the fallout to move from Wall Street to Main Street – showing up as a recession. Job markets are relative robust still and Central Banks are still talking about raising rates. Markets are forward looking and generally anticipate economic downturns, so even as rates continue to rise, employment appears to be strong, and many companies are still posting record earnings – you should be paying attention to the growing cracks in the system.
Larry will take the audience on a more detailed tour of past bear markets to see what we can learn about how this next one might compare. Will it be a gentle panda or a deadly grizzly? Can we hope for a soft landing due to aggressive government policy? How would we recognize a market bottom – when the next major bull market might begin? Why not go to cash or put all your money into a GIC right now? There are many questions to ask – and while (spoiler alert) we don’t have a crystal ball to give you the definitive answers, Larry can show you how to navigate a bear market so that you will use it as an opportunity rather than something to fear. Using some of his favorite indicators and techniques, you will learn how to use a tactical approach to trading, and strategic asset allocation (including the use of gold, real assets, and other non-equity vehicles), to help keep your portfolio within your emotional comfort zone – while avoiding costly emotional mistakes. Success in difficult markets is both a science and an art, so Larry will also discuss the psychological aspect of managing portfolios under stressful conditions.
You will take away from this live presentation a timely perspective on how to approach your investments in 2019 and beyond – along with actionable ideas to help strengthen your portfolio, and even a few tools and resources to use at home.
Click here to register for free and as always we ask for volunteer donations to one of our two favourite charities. Children’s cancer research at the Sick Kids Hospital and Alzheimer’s and dementia research at the Baycrest Hospital.