Back in my dealing room days, I was fortunate enough to be mentored by a lot of smart people who had survived in that world for many years. One of them, Andy, a senior trader at a big Danish bank, told me early in my career that there were three possible positions in anything, not two as most people thought. He told me: “You can be long if you think it is going up, short if you think it is going down, or square if you don’t have a f…ing clue!”
I heard others say similar things too, but what I learned later as I gained experience was that sometimes, square was the right position to have even when you did have a clue. That is how I feel right now with oil and the energy stocks that I follow.
The issue is really one of timing.
I still think that there are some exceptional values out there. I’m not sure that I will find another RIG in a hurry, that jumped over 150% in three days after I gave it as a buy in Energy Income Trader, but there are quite a few things that have the potential to achieve that kind of performance over the next few months.
The problem is that now is not a good time to buy them.
Crude’s strong rebound after the craziness in April always meant that a retracement was on the cards, so today’s action is not really that surprising (As I write, WTI is down over 8% on the day). In fact, normally I would say it was welcome, and represented a good buying opportunity.
As we all know, though, markets aren’t “normal” at the moment.
For months now, both oil and stocks have shown a tendency to swing around violently, with sudden mood changes leading to moves that are out of all proportion to what may cause them. It made no sense for WTI to trade in negative territory, for example, but once it did, jumping $70 a barrel from that minus $40 level in a month made no sense either.
The bounce was based primarily on a gradual reopening of some states’ economies, even though there was still a significant risk of a so-called “second wave” of coronavirus cases. The data seem to be suggesting now that that is what we are seeing.
That justifies a retracement to cool things off a bit, but there is a chance in the current environment that what we will see is more of a second collapse than an organized retracement.
Don’t get me wrong… I’m not saying that will happen, but it could, and that makes buying now a high-risk proposition.
At some point before too long, it is much more likely that WTI will push on up through $40. Based on the reactions so far, there seems to be a desire throughout most of the U.S. to get back to normal, even if that does mean another spike in coronavirus cases, and even if it does cost some lives. Add in the effects on supply of continued rig-shuttering in the U.S. and the extended OPEC+ cuts, and up looks like the path of least resistance.
However, this is not a market to be bottom fishing on a move that has just begun. I would far rather wait and let that move either develop or reverse before establishing long positions.
That base case, that oil will rebound quickly at some point, however, means that I am not about to short anything either.
I am still comfortable with long-term picks like RDA/A, EPD and KMI, even though some of the profit on all those trades is disappearing as I write. When oil does reverse again, they will go with it, and those highs can be reached again quickly. So, if the move down proves to be a false alarm, I will still be making money on the way up.
Meanwhile, though, I will remember Andy’s wise words that square is a position too and wait for a better entry point for longs or a clearer picture before committing to anything.
Good Luck!
Cheers,
