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Commercials are still net-sellers, but they are less bearish than they were last week. I think the yellow line may have bottomed as it did in the past, referenced by the 3 yellow arrows. This literally means a slowdown in commercial selling and a pickup in commercial buying. Commercials typically like to buy into weakness and sell into strength. In other words, if oil continues to decline commercials are likely to buy the pullback. This will setup the market for a summer rally. On the other hand, if oil moves up right now without commercial participation, lead instead by large traders (the trend followers); this would give me a signal to stay out of this market until we see the necessary pullback and a pickup in commercial buying. Quick note on oil stocks: Oil stocks and crude oil often move in the same direction. However, one can display relative strength or weakness against the other. I think we will see oil stocks display relative strength versus crude in the coming months. I will be looking for crude oil to decline and make lower lows while oil stocks trade sideways without making lower lows. This happened in 2005 after crude peaked in late August. In the correction that ensued, crude oil bottomed in late November while oil stocks bottomed much earlier in mid October! Broad market Not looking good! In the recent market sell off, commercials did not show significant buying interest. In fact in the S&P 500 index commercials sold into the decline. This is very bearish, and is probably telling us that if the markets bounce here, commercials will use that opportunity to sell. I would have to say it looks like we are on the heels of a potentially very big decline in the stock markets. A market crash is not out of the question. And this is where Jim Puplava squares off against James West. JIM VS. JAMES First of all, before I write anything, I would like to say this: I have the utmost respect for Jim Puplava; most of what I know today, I learned thanks to him. A better title for this article is TEACHER vs. HIS OWN PUPIL. In any case my objective here is to get people to think for themselves rather than agreeing to various trains of thoughts without understanding the underlying reason(s).
Contrarian x Contrarian I will make this short: Jim’s argument is for higher nominal prices due to inflation caused by the huge money supply growth all around the world, I agree 100%. At the very same time I disagree 100%. Remember that interview with Louis-Vincent Gave? (http://www.financialsense.com/Experts/2005/Gave.html) Louis Vincent-Gave basically said that ‘things are different this time’. He said that the US economy is transforming from being industrial based to being service based. I understood that as, globalization. The problem with globalization is…this little bugger called PEAK OIL. When Jim asked Louis about peak oil, Louis replied and I quote: ‘I think we have seen the highs on oil…I don’t buy into the whole peak oil thing’. Since then, crude oil made new highs, and will MOST PROBABLY make new highs in the near future. Funny enough, I agreed with most of what Louis had to say! BUT here is the root problem: Imagine you have two territories divided by a long fence. On one side of the fence are the contrarians. On the other side of the fence are the sheep. (The sheep are your typical clueless investors). The sheep outnumber the contrarians by a margin of 10 to 1; maybe even 20 to 1. So the problem with arguing with the contrarians is that you end up on the OTHER SIDE of the fence amongst one of the sheep. You are probably there for a DIFFERENT REASON, but in the end, you are still there. And when the sheep get slaughtered so will you. When Louis Vincent-Gave wrote about our brave new world, he essentially became a contrarian to the contrarians, aka a sheep. It is that simple. Where did he go wrong? Probably when he dismissed peak oil. So, when Jim Puplava says he expects higher prices for stocks, he is a contrarian to the contrarians. However, I know that Jim invests in gold, silver, energy, alternative energy, foreign currencies, health care, T-bills, consumer staples, water, and food; so he is far, far away from any sheep, you must understand that. I am specifically concentrating on his call for higher nominal prices for the broad markets. At the end of the day, you can buy the broad market, sell the broad market, or stay in cash. Those are your three and only options. If you think nominal prices for stocks are heading up, you are pressing the BUY button. And from my understanding, the sheep are also pressing that BUY button, supporting evidence could be found in the COT charts. (Hint: blue line) Conversely, smart money has been pressing the SELL button for about a year now. Simply put: if you are buying, and the sheep are buying, the net effect is that you are amongst the sheep. One day when the sheep get slaughtered, so will you. Think about it for a while, Yours truly, James Updated weekly COT charts can be found @ www.buythebottom.com PS – Here is a new chart to be discussed next week: GOLD!
© 2006
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