It's Not Too Early To Buy Crude-Based Investments
A sharp sell off in the price of crude has already taken most of the risk off the table.
We’re now well into the fourth full-fledged bear market in crude oil since the start of 2009. The first three lasted just weeks to months but saw oil prices plunge by an average of 28.3% from peak to trough.
Those declines paled next to the percentage gains in the four uptrends they puntuated. Coming out of the Great Recession oil rallied by 155% before tailing off. Ignore that huge gain as an outlier and the next three upturns still rose by an average of 51.7% before petering out.
The current sell-off has already run an abnormally long 398 days. From the last top, oil prices are now down by almost 23% (Oct. 8, 2014). The bearish action was interrupted by a tradable rally after crude had declined by about 13%.
West Texas Intermediate has fluctuated between around $70 - $105 during most of the last three and a half years. Crude has not been lower than it closed on Wednesday in more than a year, though.
Extremely negative sentiment, sharp recent declines and the excessive duration of the price trend make this look like a good spot for traders to get long. Consider buying the United States Oil Fund L.P. (USO) or the complexly-named, but cutely symbol-ed iPath S&P GSI Crude Oil Total Return Index Medium-Term Notes, Series A (OIL) ETN.
History suggests you’ll get a chance to trade out for at least a 20% - 50% gain on crude’s next rally.
No position at the time of publication
Looking back at the chart for (OIL), it seems it began its steep decline on around June 25. Since then it has continued a steady and steep decline.
Looking back to October 8th when you had suggested it was maybe time to buy, the index has tanked over 40% from $21.53, down to $12.54 as of today Dec 30!
Question is, have we hit bottom yet?
Yes, that is an interesting comment by John Hartley. Negative sentiment on oil is not without good reason given that the US has increased it's in house oil production and technological advancements have started to reduce the need for oil.
However, I do think there will definitely be a spike in oil because the steady decline has been also heavily attributed to the strength in the dollar. It would seem that the dollar's upward trend will soon end, which Michael Pento actually outlines in his article here:
http://www.talkmarkets.com/content/us-markets/dollars-ride-is-about-to-end?post=50460
So in the end, recent historical trend should hold out but the most important question here is: for how long?
I find it best not to try to catch a falling knife. Playing the bounce is great, but mistime your entry and you can be left with sizable losses.
Great article, and a great time to invest. But I wonder how fast to pull out...I'd imagine oil price spikes are usually short lived.