Oil’s dead cat bouncing: more like Silly Putty

Up early in the week, down big-time Wednesday, oil bounces back up Thursday as markets follow in lock step. What’s going on here?

Dead cat cartoon.
"Dead cat bounce." Cartoon sketch of clearly pre-deceased cat, via Flickr, modified by the author.

WASHINGTON, February 5, 2015 – “It’s up! It’s down! It’s up again! It’s down big time and we’re all going to die!” We’re talking about the per barrel price of West Texas Intermediate (WTI). Black Gold. Texas Tea.

Some financial pundits are saying that this series of ups and downs in the oil commodity patch are nothing more than a dead cat bounce. But to us, oil price action in this week’s markets looks more like someone has replaced those deceased felines with Silly Putty.

WTI is up Thursday over 7 percent, at least as of the noon hour, moving from Wednesday’s $48 plus or minus, to a range of $51-52 bbl. Every time oil makes one of these mega-moves, a day or two later it reverses. And every time and in every direction that oil moves, the entire market has followed this year like an uncommonly obedient child. It’s strange beyond belief and maddening for serious investors.

One result of this massive, bouncing commodity ball is that the financial pundits and TV blow dries are huffing and puffing broad pronouncements that, in turn, get scuttled about every other day.

Here’s one from CNBC today:

“The bullish factor is that oil prices have stabilized,” said Bruce Bittles, chief investment strategist at R.W. Baird. “Now that oil prices have stabilized (investors) are changing attitudes towards the global economy.”

We’ve got that, Bruce. But one of your rivals begs to differ, blathering in a different direction on the same network:

Sociéte Générale’s notoriously bearish strategist, Albert Edwards, has warned that the deflation threat currently dogging the euro zone is greater in the U.S. and that equity markets will soon be “ripped to smithereens.”

“The deflationary fault line on which the U.S. sits is every bit as precarious as that of the euro zone, but is being disguised,” he said in a new research note on Thursday.

“The scales will soon lift from the market’s eyes.”

Be afraid. Be very afraid.

Both pronouncements are utter nonsense. Why would oil prices have “stabilized,” Bruce, “when it’s clear that HFTs, hedge funds, and big traders are having fun moving prices up and down like a yo-yo for fun and profit? Which orifice did you pull that opinion out of?

And Albert, thanks so much for the reassurance. Can you define “ripped to smithereens”? Can you quantify that? And how soon is “soon”? Or are you really saying your book is short right now and you’d like investors to panic so you can make more money when they stampede for the exits?

As the Maven mentioned yesterday, we’re likely entering into something resembling a trading range for oil, with parameters yet to be developed, but likely settling into a $40-60 bbl. range for the most part. Within the range, scary trading days will happen. But as prices here eventually stabilize—which clearly they have not—markets should begin once again to get more rational.

RELATED: Adding preferred stocks to your portfolio: A brief primer.

But exactly when this happens will be determined by God and Mr. Market, not headline-grabbing pronouncements by the likes of Bruce and Albert. Most general pronouncements like these tend to be obsolete within minutes of having been uttered. So pay no attention to these preening one-percenters.

Instead, let’s just watch where Mr. Market, along with oil, the Greek contagion, and everything else are going in the near-to intermediate term and slowly deploy our hard-gotten funds accordingly.

Today’s trading tips

None, really, save a follow up on Wednesday’s ideas. We’d stay in a fairly high cash position, venturing out into a limited number of ETFs and, perhaps, a few “term preferred” stocks. These are preferred stocks that will be called at par on a specific call date or earlier.

We’ll talk a bit more about preferred stocks in a companion article we’ll be running just a bit later today in our other column. Stay tuned.

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