Oil dropped off today below $129, apparently on demand concerns. What a load of rubbish!!! As I have written time and again before this market is exhibiting classic signals of a technical bull run. I really do think that we could see the $150 level challenged before the year end. However, in the meantime a pullback is looking likely. Prices peaked at just over $135 and volume flow into the market was massive.Since this move momentum has stalled and we have seen a gradual overall retreat, characterised by a lot of volatility.
I have been wondering over the last few weeks, whether or not the end of May would be a good time to short oil. In very basic terms this view sort of makes sense as the holiday season is around the corner. Why would a trader load up on more positions at this stage? Equally the temptation to reduce exposure and take profits, in light of the upcoming break, must also be a strong motivation. Ignoring the fundamentals of demand, I do think these two points make a fairly compelling argument for a likely pullback.
How far will oil drop?
According to the system there are three potential entry points. These are 12401:12421, 11692:11714 and 10813:10829.
As I have written before the first of these has a very short-term base, stretching back a month or so. This might be a decent place to get in on a very short term basis, but I am likely to wait for the price to pull-back to one of the other two levels.
I know that the Strategic Petroleum Reserve Announcement stated that they will only start buying oil at $75; I think this is an unlikely occurrence this year. Equally I don’t really think that oil will go back below $100 before challenging $150. Assuming the price does get down to 11692:11714, I will probably load up on long positions at this point. Of course timing will play a factor and my optimal entry point will probably be towards the end of August.
Moving back over to stocks and the prospects of the economy, I had a very interesting conversation today about the likely impact of wage inflation on corporate profitability. Inflation has been a theme I have covered and is a real concern to me. Inflationary pressures are rampant all over the world (the oil price being one of the most obvious manifestations of this).
One of the BBC’s main news programmes ran a telling feature a few weeks ago, which helped frame today’s conversation. The basic assertion was that families across the UK are really starting to feel the pressure of rising prices, too much debt and falling house prices. OK so there are no great shocks there, but I do think this gives us a real insight into developing a medium/long term trading strategy.
So far corporate profits have not come under too much undue pressure. The banking sector apart, last earnings season was broadly in line with expectations, if not erring on the upside.
There is likely to come a point though, when employees start to demand more in their pay packets to cover the costs of living. If this does start to happen (and here in the UK we have seen the first signs of growing discontent in different labour forces), then this is likely to have a serious impact on corporate profits, which will translate into lower share prices. For most companies, one of the largest cost bases is the wage bill.
Slowing growth is certainly a major macro challenge facing companies, but I have not really picked up on any commentary pointing out wage inflation as a serious threat.
I have to be honest and admit I am not too familiar with the wage stats that are released in the US and UK, but starting next week I am going to start to pay far more attention to these data sets. If I am right on this point then I could seriously revisit my Dow 11000 prediction (if not worse!)