THIS IS UNUSUAL. In the last three days the operative algorithm has changed from Value-Bronze-Hybrid-Bull to Value-Bronze-Hybrid-Bear and back to Value-Bronze-Hybrid-Bull.
Given the flip-flop we sense that the market is at an inflection point. It seems that the majority of market participants are doubting the vitality of the last month’s rally. I would count myself in that group.
Because the market takes on, at times, a pernicious nature. During those periods it tends to bite the largest available group.
The recent rise in Energy and Energy Services seems to be a product of the prospects of a agreement to freeze oil production at current levels by major oil producing nations. The meeting is taking place at Doha, Qatar this weekend.
A cut in production is off the table, a non-starter.
A freeze in production is unlikely because of the antagonistic nature of Saudia Arabia and Iran.
There has been a bulge in put options (bets to the downside) on the stocks of exploration and production (E&P) energy companies, big oil companies, even the XLE (the ETF of the energy sector).
Ed Morse, Energy Analyst at CitiCorp, said today that “if no credible agreement comes out of the meeting Watch Out Below”.
World production of oil is currently 1 million barrels a day more than current consumption.
Russia has said that they will freeze production if Iran does.
Iran says that because of the recent lifting of international trade restrictions their production should be allowed to reach pre-restrictions levels before freezing.
With some luck, the net effect of all this will be reflected in next week’s activity… until then.