Ignore Low Volume Market Zig-Zags In August

Heading into August, the smartest advice I’ve taken has been to back away from markets. Volumes are weak, interest is small (particularly in an election year), and the temptations get large to do stupid things with your money – you’ll see many supposed sure-fire “opportunities” that can turn quickly south in thin markets.

That’s why I hesitate to get further involved in even prized oil stocks here, despite the fact that a mounting gasoline glut has allowed oil prices to decay under $42 a barrel and taken some US E+P’s down to seemingly tasty levels. I’ve seen this show before, and I don’t want to fall for it. It’s an uneven picture: Some of our stocks are at levels that would beg for a bit of adding, like EOG Resources (EOG) at $78 a share, or Cimarex (XEC), getting closer to $110. Others are holding up surprisingly well even as oil has dropped more than $8, like Anadarko Petroleum (APC) (which reported fantastically well) at around $54, or Continental (CLR), which refuses to trade under $40 again. This kind of ‘mixed bag’ of signals has me ready to head out to the beach as well and leave the portfolio just as it is for now.

It’s hard to do. The drop in crude prices has all the boo birds back in business, claiming a new downtrend that won’t see oil significantly rally again for at least a year. Goldman Sachs is one house that has claimed this in a note today. Morgan Stanley, despite recognizing the massive drops in production that will come from non-OPEC and US supply in Canada, Brazil and Mexico and recognizing that those supplies make up more than 50% of global oil, still don't see a significant supply shortage until mid to late 2017.

These kinds of notes from the major banks could have you wondering whether you’ve come too early to a global oil supply squeeze that almost everyone recognizes is on the horizon.

I say you’re right on time.

One idea to think about, while we’re lounging on the beach, trying to ignore the low volume zigs and zags of the markets in an election year, is the complete validation we’re seeing of the Saudi plan to regain control of the oil market. Only today, Halcon Resources (HK) joined 67 other US E+P’s since 2015 to declare bankruptcy – and remember, this was a company run by the oil seer Floyd Wilson, who delivered Petrohawk in the Eagle Ford to a $15b sale for shareholders in 2011. Meanwhile, all of the immediately recoverable oil that bankruptcies of US companies like Halcon (and continuing drops of inventories) won’t deliver in 2017 are in the hands of the Saudis and the Iranians.

That turnaround is precisely the power that the OPEC cartel needs to adjust prices in their favor again when they deem ready to do it. It is precisely the end goal that the Saudis have been shooting for since 2014.

But nothing will happen now – not with oil markets sloppily trading back and forth, losing 14% on a domestic gas glut that everyone’s known about since March. That huge market reaction to small inputs has analysts grinding their teeth to find dire, consequential reasons for – and panicked new strategies for.

I say don’t do it. Late summertime markets have a habit of inspiring lots of wrong moves for lots of wrong reasons. After years of seeing this pattern, I’m going to pour a cold drink, take a break and trade less.

And that’s my advice to you.