Stocks, crude oil dancing to beat of crowd psychology

The big news of the week is the surge in oil. Of course there are geopolitical concerns. But we’ve known about Iran and their nuclear desires for several years. Interesting how supply is front and center during bull runs but not in bearish phases. I’m sure you’ll remember that in 2010 when the market was declining they didn’t care (from a price standpoint) if every last drop of oil spilled in the Gulf. What did oil do in that sequence?

It crashed. I don’t buy into the fact that oil is going up for any reason other than in bullish equity phases oil goes up. People are feeling more prosperous as a result of a higher stock market and are naturally more concerned with supply as opposed to demand destruction.

Of course, in 2010 everyone cared about the horrendous pictures of wildlife and BP negligence was cause of the damage to some of the nicest beaches in North America. But the stock market was in the biggest correction since the 2009 bottom and people weren’t feeling very good. There was actually sentiment that oil would be replaced by some alternative energy source.

That’s the irrationality of mass crowd psychology. Did anyone seriously believe we were going to chuck our commitment to SUV’s and the oil companies? You’ll never see a better example of irrationality. Now the politics that wins this day doesn’t care if they send all of the Canadian oil to China. Crowds are irrational. If you can remember that, you have half the battle won. Fundamentals mean little when emotion is involved.

Oil stocks are contributing to keeping the SPX up (among other things). But on the other hand the price of a gallon of gas is GOING TO BE A DRAG ON THE ECONOMY. Last week numerous reports stated it wouldn’t. I don’t believe it. Look at the VIX, it’s at euphoria levels. To understand why media reports suggested we could absorb higher prices all you have to do is look at market sentiment. There’s no fear in the market. You tell me. If you live in California and have to drive 50-90 miles each way to work, you want to tell me $4 gas doesn’t mean anything?

If you live on Long Island and have to drive 50 miles into the city AND THEN PARK YOUR CAR IN A GARAGE like they do in Manhattan, you want to tell me it doesn’t mean anything?

I don’t buy it. Here in Phoenix we have a light rail which means if I wanted to take it, I have to drive 20 miles to get to it. Gas is a concern in the East, West and I’m sure all parts in between. Finally in Sunday papers around the country I started seeing signs of grumbling. In one story, a gas station owner in Brooklyn, NY stated that he had 4 voting booths (gas pumps) and Mr. Obama had better watch out because his clients would be voting with the pocketbooks if the situation remains the same later in the year.

If oil is contributing to a bull market and is partly responsible for the good stock market, what comes first, the chicken or the egg? IT’S MARKET PSYCHOLOGY. When the market finally finds a calculation it likes, psychology will reverse and that will be that. But truth be told, it’s not only oil that stays up. Apple computer has been consistently up since the drop over a week ago. It contributed to a market that stayed up last week although the SPX still can’t get beyond 1370. The high tick for the week was 1368.92. I saw a lot of charts rejuvenate last week. As I said Apple never dropped and is retesting the high again but the biotech index is in the midst of trying to turn as is the Transports. Biotech looks better than the Transports at this point as the Trannies are sitting at the low end of a narrow trend channel. But here the Transports are sitting at 161 days off the 2011 peak and do have the opportunity to put in an inversion turn. But the bottom line to the Transports is a test of polarity to the October and November peaks which are now the ridge of support prior high. The Transports have gone almost as far as they could go without creating any real technical damage to the charts. Giving it a slight margin for error, if they break below 5000 they are going to have trouble retesting the top on any serious bounce. Right now if they turn back up they are still fine.

Click chart to enlarge

But as long as China keeps going up and the banks stay neutral to positive nothing bad will happen to the market. We follow the SSE very closely and last week it finally broke through a pitchfork channel that has contained the action since last year. China is on the back end of its own 618 day window off its secondary high so if it stayed in the channel it had a perfect storm setting up to reverse and it did not. It might the most bullish news of all since the channel didn’t repel the action now the higher probability is that even if we do get a turn, the move off the low is powerful enough to only turn the action sideways and not back down. That could keep China sideways all year.

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