Kirk Spano was tabbed "The World's Next Great Investing Columnist" by MarketWatch of the Wall Street Journal network in 2011. He has written for Motley Fool, Seeking Alpha and been widely distributed by various newswires, brokerage feeds and on Morningstar. As one of the first to identify the developing resource boom in America, Kirk has been able to pass on stellar returns to his investors and subscribers. He has appeared on Fox Business and made regular appearances on the radio. Mr. Spano is the founder of Bluemound Asset Management a fee-only Registered Investment Advisor.
With oil and oil stocks crashing right now, our decision to be light oil stocks since summer time has proven to be very important. A month ago when I talked about asset allocation was also good for us, as hopefully everybody moved to at least 25% cash holdings. Now we need to focus on the dominoes that could still tumble with oil.
With the addition of some algorithmic analysis to our approach we can look for better entries. Subscribers will see on our current "much own" stocks update that only a few companies are good buys right now despite the lower prices from just a month ago.
In coming weeks and months, I believe it is very likely that we get financial crisis pricing on many of the oil & gas and oil & gas service stocks we have targeted.
On Thanksgiving, the news that I said would come to pass, came to pass. OPEC, the Organization of Petroleum Exporting Countries, agreed to not cut oil production. The result on Friday was a crash in oil prices and oil company stocks. The ongoing impact will be significant and lasting.
This Thursday isn't just Thanksgiving, it is OPEC meeting day. On November 27th, between touchdowns and turkey sandwiches, keep an eye on news out of Vienna where OPEC will be meeting. This meeting will push oil prices either higher or lower, depending on what members decide to do with production.
Key to OPEC's decision making process is how do they react to America's continued resurgence in oil production.
While markets might rally or fall quickly on Friday and the next following week, the real story is what I wrote about on MarketWatch regarding the Peak Oil Plateau. As I discussed in June, there is a developing equilibrium between oil supply and oil demand that will likely last a very long time, albeit crisis periods and mismanagement. This equilibrium will lead to a tighter price range for oil and oil products than many just a few years ago anticipated.
There is a lot of speculation about the decline in oil prices and the effect on oil companies. In the short-term there is really only one thing we should be thinking - "how big is the opportunity in oil stocks going to get?"
The use of oil is slowly drifting upward and will for at least another decade. While supply is at the high-end of the range right now, it is also clear that is a temporary situation.
As you can see from the chart below from the most recent Short-term Energy Outlook from the EIA, supply and demand are moving roughly in tandem for now. Over the past few years, with the slow economy and increased production in North America, we are seeing slight price destruction.
I don't make recommendations to folks about asset allocation unless they are an advisory client, so, take this for what it is, my thoughts on where the market is and what I'm doing about it for clients.
I discussed a few weeks ago on MarketWatch the opportunities that algorithmic traders are giving you. Because they are by definition trend traders, they are piling on in whatever direction markets are moving. Right now, they are piling on the S&P 500 and a few sectors to the upside. They are selling short energy and driving it.
In my opinion, neither makes much sense. From a mathematical standpoint, the large caps are very overextended. There is a divergence with smallcaps that's been going on much of the year that's not usual, except for the end of bull markets. It's hard to say how close we are to the end of the this rally, but I'd say we are no earlier than the 7th inning of a 9 inning or extra innings game. We might in fact be in the 9th inning, it's very hard to say given the incredible amount of intervention by the central banks.
Here's an important chart: