The Oilpatch: "It's a Cyclical Sector - Stupid"
As far as those who saw this quick pullback to OSX 115 intra-day as some type of buying opportunity - that concept raises a few interesting points.
The first point; is that it could only have been an opportunity if you were allready well positioned in advance to take advantage of it - ie: allready having had sold at significantly higher levels etc.
... The fact is few were and few did.
Most were allready fully invested in Oils - or worse yet; in Tech and Oils.
For this pullback to have been an attractive opportunity would have required a few pre-requisites...
1. You would have allready had to have taken lots of chips off the table at significantly higher levels.
... and you can count those who did that on SI's Oil threads - on one hand...
2. You would have to view the brief intra-day interlude to 115 as compellingly cheap.
... cheaper ? - yes; compelling ? - no; not imho, not with whats going on in the broad market & global economies and first & foremost; recognizing that we are in the mature point of the oilpatch cycle.
3. You would have to believe that the OSX isn't going to go substantially lower than OSX 115.
... many don't, some saw this as a test, a "probe" by the shorts to the downside - perparing for a stronger short forray into the next leg down in the broad market bear, or on any weakness in crude, or gas prices.
4. You would need to believe that the OSX is going to significant new highs above OSX 140.
... maybe, maybe not; but it is a when & not an if proposition; that sooner, or later we are going to get a perceived "buying opp" pullback that is merely a brief pause on a much more substantial downward move as the cycle in "shareprices" rolls over much sooner & far in advance than either commodity prices, or frontline activity levels do.
5. You would need to believe that the OSX offers more upside than long/short bets on other sectors.
... I'm not sure it does any longer as both the "Big and the EASY" money has allready been made in this Oil Cycle & obviously so & other cyclical sectors, as well as the eventual bottom formation in tech and the broad market may bring better opportunities - not to mention that some may see the next "BIG & EASY" money trade in the oilpatch as being on the SHORT side.... whodathunkit ?
In a nutshell; the OSX trading range between 115 & 150 is soon to become - no mans land imho - a very poor reward level and a very high risk level.
Even though the "Trading Range" game has worked very well so far; in cyclicals - there allways comes a point within the cycle when it no longer does.
As the natural cycle peaks & crests; the dips are followed by smaller rallies & larger dips, that then turn into larger & larger dips - that no longer come back.
That is how cycles end & that is how cyclical investors loose... buy buying one dip & one pullback too many !
This is the Pig vs Hog concept ... going to the "trading range/buy the pullback" well has worked so far, but knowing that it soon - no longer will; is paramount.
This "transition" in the cycle is where the significant risk lies and begins to ramp and this "TRANSISTION" is what is occuring within the oilpatch cycle presently imho.
As the cycle matures, the significance of the potential trading range rewards is minimized on a risk vs reward basis - as quite obviously, we've allready "been there & done that" more than a few times.
One could have exited OSX 120 nearly one year ago, OSX 140 6+ mos ago in late Aug/Sept and OSX 135+ just mere weeks ago.
The "real" upside reward is thus, now all about breaking out to signifant new highs - with the keyword there being "significant" - as given this is a cyclical sector - staying around as risk ramps & the cycle matures for another 10-15, even perhaps 20% - after having the sector tripled in the last 24 mos - is a fools game.
Thus; it takes an OSX above OSX 165 levels to even BEGIN to talk about "reward" imho and that reward doesn't really even get attractive vs cyclical rollover risk; unless it ultimately breaks thru to 175-185+.
So staying with, or re-entering with a "portfolio weighted" position in the oilpatch from here forward imho - should be on a bet that the OSX is going to 170+.
If you don't see that happening, or if you think like I do - that it may; but you want conformation in both the global economies, in OPEC maintaining discipline, in the Bear Market not accelerating - before you re-enter on a portfolio weighted basis - you should allready be "all out" - except occassional trading scalps - using tight stops.
Anyone who exited as early as last year at OSX 120, let alone last Aug/Sept at OSX 140, or here of late at OSX 135 - will have equal, if not greater opps, with much less risk in picking up the remains of the Bear bottom in tech, or the broad market bargains; or perhaps just in shorting into any further Oilpatch rallies; let alone playing "long" smartly - by adding on strength into a breakout above 145+ and no longer playing the buy the dip game; as in the mature point of the Oil Cycle - this is the kiss of death with the eventual guarantee that as usual; 75-85% of all Oilpatch investors still "in" here - will no longer be profitable going forward from here to their eventual exit.
The key to winning in cyclicals is two fold - entering & strongly accumulating into a bottom formation - keyword being "formation" - as no one is going to continually pick exact bottoms & the second part is exiting into strength and NOT weakness as the cycle matures.
The key concept in this mature point of the cycle is to sell strength & only re-buy "new" strength/highs - as the "Trading Range" game looses its risk vs reward luster very quickly as the cycle matures & as commodity prices begin to show resistance, let alone rollover...
Now is the time to trade on the technicals and NO LONGER on the fundamentals - as it is beyond any & all sane discussion; that in late cycle - the fundamentals totally & completely disconnect from shareprice moves... if they didn't; everyone would get out at the top & quite obviously in Oilpatch History - few ever do...
The key concept that 90% of SI Oilpatch investor/traders have blatantly missed is that one should have used this last rally at the peak of the "too perfect" Natural Gas storm & into the first whiffs of a slowing Global Economy as a portfolio weighted profit taking EXIT - yes; an EXIT.
Sure there will continue to be a few scalping/trading opps in the Oilpatch; but the key "MACRO" concept to making & more importantly - RETAINING profits during the rest of this Oilpatch cycle is to:
#1. ALLREADY have EXITED and -
#2. To re-enter on a "macro/portfolio" basis ONLY on new highs/new strength (NOT weakness) and -
#3. To accept that the trading range & buy the dip game is rapidly loosing it's risk vs reward upside as the cycle matures and as the econonmy slows.
#4. That at this mature point in the Oilpatch cycle - the technicals & not the fundamentals rule going forward.
... yes; there will allways be a few laggards & trading opps ( I bought a partial trading position in PDE during the 115ish pullback - nothing else quite hit my levels & I'll keep stops on PDE), but the macro & not the micro view will be the key to "RETAINING" profits and retaining profits will be the story going forward in the oilpatch cycle - it allways is in all cyclical sector cycles, if you got in during the "Big & Easy Money" bottom formation.
I don't think you make any portfolio weighted bets on buying dips here - just trades & for any portfolio weighted re-entry bets (keyword being "re-entry")- it may be better to wait for positive economic signs and a technical breakout in the OSX to "new highs" - as I think on a risk vs reward basis; it's time to put a fork in the buy the dip & trading range game - even though for the "chihuahua crowd" - this is an exercise in theoreticals - as they've yet to see a profit taking exit opp in oils & have seen every 200 points since Nasdq 3500 as a buying opp... so how do you buy the dip - without ever having made a macro profit taking exit and given the tech abyss of late; working with an ever smaller amount of capital (VBG)?
PS: ... "accumulation into a cyclical bottom formation" - now does that ring any "golden, or silver" been there & done that bells ?
Ciao ~ |
