When I was writing about trading oil yesterday I failed to mention the likelihood of a long squeeze. I had this at the back of my mind, which is why I advocated not trading until tonight. A long squeeze occurs when there is an extremely high probability of a certain factor having a high impact on a given market. This encourages lots of traders to take highly leveraged long positions with little margin. These positions are in their very nature extremely weak and can encourage large players to force them out by going the opposite way. As soon as stop losses are triggered in the weaker positions, this can have a snow balling effect and manifesting itself in a sharp movement in the opposite direction that everyone expects.
Yesterday we saw oil hit $120, then collapse back to $114.50. I went long at about $115. I was keeping an eye on this market and saw an opportunity to get in. I am still planning on taking on more positions tonight. Gustav is looking like it is going to be extremely nasty. Once it hits the Gulf of Mexico apparently it is going to hit a stream of warm water all the way to Louisiana. This will fuel the strength of the hurricane as it hits the Gulf’s drilling platforms and moves to the refineries.
This will probably cause at least a $5 spike, which I expect will be followed by a collapse to the range we have witnessed in the last month.
Has the news worm turned?
The economic news flow in US markets has been relatively positive this week. Of course I do mean relative to the apocalyptic series of stories and commentary we have grown accustomed to this year, but generally this turnaround is well-timed for the rally I am looking for.
Although the Dow is down about 90 points as of writing, this week has been very good for this index, the FTSE and the Nikkei.
Yesterday’s upward revision of US GDP data was extremely helpful as was news of signs of improvement in the US labour market. While we saw US personal spending take a heavy hit today, I feel this was offset somewhat by much better than expected manufacturing output data and confidence indicator in the Chicago PMI and Michigan Sentiment Review. If this mini-trend of positive surprises continues into next week’s Payrolls Data then this should help push the indices through their resistance points.
Thinking about the GDP data, I am fairly skeptical about this upward revision. A move of close to 1.5% is huge and well beyond what I would expect as normal statistical variance. A lot of this result was explained as being as a result of increased exports as a result of Dollar weakness. What I am suspicious about in this explanation is that the bulk of US exports is on a business to business basis. Anyone remotely familiar with running a company will know that changing suppliers is not an easy thing to do. It is difficult and risky to move such relationships. Typically businesses also have to run down inventory before moving over as well. I find it hard to believe that US exports have improved so quickly. One possible explanation is that existing purchasers of US goods have taken temporary advantage of Dollar weakness to build up inventory and improve future margins. Irrespective of this I will keep an eye on any future revisions for this figure.
Obama’s acceptance of the Democrat nomination
I have actually taken some time off this afternoon and took the opportunity to watch Barack Obama’s speech yesterday. http://news.bbc.co.uk/1/hi/world/americas/7587321.stm
It is actually well worth watching. I have picked up on some commentary accusing him of hubris, but having seen the speech I actually think it is one of the boldest moves I have ever seen. This man oozes the kind of confidence we rarely see in our public figures. His rhetoric actually carries some weight and I hope that it turns out not to be just political spin. The message that Obama represents is one of change. As I wrote, on my return from America, this is exactly what the US needs to hear and seems to be desperate for.
I know that Obama’s lead in the poles isn’t that spectacular, but I still expect he will win by a landslide in November. McCain’s campaign already looks tired and too closely associated with the current Administration. We will have to see how well received McCain’s running mate is received (he has announced this afternoon that it will be Alaska Governor Sarah Palin) but I can’t see him arresting the decline. Budgets are going to play a massive part, as ever in the US politics, and Obama has a huge lead on that front.
We will have to see how things progress in the next few weeks, but if Obama opens up a lead in the polls, his message of change is likely to stir the market rally I am banking on.