Gas Lines

If you seek it, you cannot find it
--Zen riddle

Spikey crude has all kinds of market participants taking a short side swipe at the energy sector. Has the price action been bubbly? Sure seems that way as the charts have that parabolic look.

But my sense is that all this attention from the bears will prolong the move higher. About 3 yrs ago, the homebuilders were going ballistic and shorts were tripping over themselves in anticipation of a huge reversal. But the homies kept going higher, and the subsequent short squeeze squirted prices into the stratosphere. It wasn't until most of the bears shifted attention from the sector that the homies began a death spiral that knocked 70% off the index.

A similar phenomenon occurred with the financials. The bears knew the story cold. It was a tale of massive leverage and risk that was bound to end badly. So the shorts piled on in anticipation of a massive reversal from the multi-year uptrend in the financials. Once again, bears were carried out on stretchers daily as prices squeezed higher. Then, in mid 2007, after most exhausted bears had thrown in the towel (I was one of them, covering just about a week before the turmoil began last July), the price decline commenced. The bank index is down some 40% since with some financial firms much lower (e.g., ABK, BSC, NCC).

The point? Bubbly tops rarely emerge when bears are so intent catching the ride lower. My sense is that the probability of a significant decline in crude is low until the stretcher count of blown out shorts rises.

Once the attention of the bears shifts elsewhere, then oil prices are more apt to, er, slide down a slippery slope.

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