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January 17, 2006

Oil Breaks Out

The answer is UP. Last week I discussed my expectation that oil was on the verge of a spike in one direction or the other. Whether because of turmoil in Africa and Iran or technical or other reasons, oil spiked upward nearly 4% today. The move sent oil stocks soaring. The biggest gainer on my screen was Conoco-Phillips, up about 5%. My favorite small producer, Encore Acquisition, gained about 4%. I took on a small position in EAC on Friday after judging that the odds favored oil spiking upward. I may add to it with this breakout, but have not decided, yet.

For the intermediate term… and by "intermediate", I mean 2006… I expect oil to hit a serious weak patch as demand is mitigated by recessions in the U.S. and China. Whether oil goes to $80 or more before hitting that weak patch is an unknown, so for the time being I intend to play oil purely as a technician. However, technicians, especially bullish ones, have to love today's action. The XLE gapped to a new high, behavior that could signal a larger move to come.

Major indices weakened a bit, their third day in a row to the downside. The slough was lead by the Nasdaq Composite, which dropped about ¾%. Seeing the weakness, I had to resist a strong temptation to get heavily short. Though I'm expecting a sharp decline in equities, I did not observe any market behavior that suggests the odds would favor placing bets today.

However, I reserve the right to change that judgment on a day-by-day basis. Earnings season is upon us, and a series of disappointments could ruffle Papa Bear out of his cave. Glancing at my screen as I write this, it appears that Intel, IBM, and Yahoo have already provided a trio of disappointments. Their shares are down $2, $1.50, and $4.30, respectively, in after-hours trading. Yahoo's miss also appears to be a drag on Google shares, which are slumping about $15. How the market handles all this tomorrow will be very revealing.

Disclosure: Long EAC; Short INTC; Long INTC, YHOO Puts


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