Is Energy Ready For A “Dead Cat” Bounce? Each week in my weekly newsletter I do a complete overview on major markets, sectors and other market areas such as interest rates, gold and oil. I bring this up because the recent melt-down in oil and energy related stocks is something that I warned about in early August of this year when I wrote:
“Analysis: Massive Divergence Not Healthy
While oil prices have surged this year on the back of geopolitical concerns, the performance of energy stocks has far outpaced the underlying commodity.
The deviation between energy and the price of oil is at very dangerous levels. Valuations in this sector are also grossly extended from long term norms.
If oil prices break below the consolidation channel OR a more severe correction in the markets occurs, the overweighting of energy in portfolios could lead to excessive capital destruction.
While the argument has been primarily focused on the “yield chase,” the “price destruction” will far outweigh the desire for income. It is a good time to take profits in the sector and reweight portfolios back to target goals.”
During the entire reversion process, I kept warning in that weekly missive that things would get worse for both the commodity and the energy sector as the supply/demand imbalance grew and deflationary pressures circled the globe. Those predictions have come to a rather painful realization.
The good news, as I will address in more detail in this weekend’s X-Factor Report, is that the selloff in oil has gotten to extreme levels. This decline should allow for oil prices to experience a rather significant “dead cat” bounce. This is shown in the chart below, where previous plunges to current extremes have resulted in a rather significant bounces back to at least the previous trendline break. (I have used performance to keep the scale in proper alignment),
This post was published at StreetTalkLive on 06 November 2014.
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