About two months ago, when crude oil prices were crashing, the airwaves were filled with trend-followers’ predictions that the price was headed for $20 a barrel. As soon as that became the prevalent opinion, Mr. Market figured it would be a good time to teach complacent short-sellers a lesson, and prices began a meaningful rally.
Now you might be surprised to learn that while this year has been dull as dirt for most asset classes and sectors, oil and energy stocks have emerged as leaders.
The remarkable turnaround led the analysts at TIS Group to wonder about the historical record of massive crude oil price declines and their aftermath. They wanted to know the average size of the rebound from a decline of 50 percent or more, and the average length of time to the next peak. With that data in hand, they could make a reasonable estimate of the size and length of the current rebound.
The analysts determined that crude oil has recovered 80 percent of its biggest declines in the subsequent rebound, and that if the current rally takes on the shape of the average of its peers over the years, crude will peak on July 2 at $78.60. Of course every smackdown and rebound has its own story and quirks, but this is not about being exact regarding the what and why — it’s about measuring the crowd effect, and figuring human nature is more or less always about the same.
Right now, crude oil is around $59.40, so it’s not too hard to imagine what might make it shoot up $19, or 32 percent, over the next 52 days. That’s roughly 35 cents a day. Short positions are quite extended right now, so a panicky squeeze could do a lot of the work. Some more bad news in the Persian Gulf or Russia could push up the geopolitical panic premium. A positive resolution on Greece could help allay fears about global growth. The most straightforward way to take advantage is to consider buying the SPDR Energy (XLE) on dips.
Best wishes,
Jon Markman
