Posts filed under “Psychology”

The Psychology/Sentiment of Oil

I’ll be damned if I can explain exactly how this happened:

Last year, when Oil passed $40 on the way to $55, there was a resounding chorus about prices: Its only temporary, oil cannot stay this high, there was a $10, $15 even $20  terror premium built in.

Recall that The Big Picture repeatedly has disagreed with that sentiment.

Now, suddenly, its all but gone. There is an  eerie recognition from analysts and the media that oil will be pricey for quite a while — indeed, indefinitely.   

How does that happen? What is the group dynamic, the psychology, that allows such a shift to take place? Perhaps one can only be wrong for so long, continually losing your (or your clients’) money in the process until, well, there ain’t no more. When the not long and wrong crowd lose all their dough, their megaphones go away (that’s merely a guess).

Maybe this helps to explain the shift :

"When the second quarter of last year got under way, analyst forecasts called for energy companies in the Standard & Poor’s 500-stock index to earn 3% more than they had a year earlier, according to Thomson First Call. Earnings grew by 62% instead. At the beginning of the third quarter, the analysts expected earnings growth of 16%. They got 56%. In the fourth quarter, earnings grew by 101%, versus the 39% analysts predicted."   - Justin Lahart, Energized, Ahead of the Tape, WSJ
 

My bigger concern is:  Is energy becoming a crowded trade? When does the crowd turn into a mob? As in, when does this newfound appreciation of oil prices become a contrary signal?
Jim Cramer mentioned yesterday he was a seller of oil stocks, but IMHO
he’s  merely making a gut feel trade (also known as a guess). I need a
more concrete sell signal before blowing out.

Lastly, here’s a WSJ article on the subject of Oil Futures:

Wsj_03072005212506
"As often happens during a crude-oil rally like the one seen in recent weeks, most observers are focusing on the price of oil contracts for immediate delivery, currently at $53.89 a barrel. In an otherwise fragmented global market, this contract provides a standardized benchmark. When professional traders, economists or families chatting about current events at dinner talk about the price of oil, they are all referring to the "front-month" contract.

Yet the market for long-term oil delivery has become more active than usual and is sending its own message: The real danger of a crude-supply pinch is months or years away, but expect a spate of generally high prices for the foreseeable future.

"I used to think, forget it, $40 oil is not sustainable," says Oppenheimer & Co. energy analyst Fadel Gheit, a 30-year industry veteran. "It has to come down from there. That’s what I was taught. But things have changed. The center line for oil prices is clearly moving up."

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UPDATE:
With this post, I am adding a new category:  Psychology/Sentiment. I reference it enough, and thought it worthwhile to explore the subject as a stand alone topic.

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Sources:
Energized
Ahead Of The Tape
Justin Lahart
WSJ, March 8, 2005; Page C1

http://online.wsj.com/article/1,,SB111022698887472539,00.htm

Message From the Futures: High Oil Prices to Stick Around
By PETER A. MCKAY
THE WALL STREET JOURNAL, March 8, 2005; Page C1
http://online.wsj.com/article/0,,SB111021882177972367,00.html

Category: Commodities, Markets, Psychology

The kinda-eventually-sorta-mostly-almost Efficient Market Theory

“I guess we’re all behaviorists now” -Richard Thaler   One of the most widely believed theories on Wall Street is the Efficient Market Hypothesis (EMH). Adherents of this charmingly naive thesis believe that markets are an incredibly effective distributor of information. Because of this, say EMH theorists, it is impossible, therefore, to beat the market,…Read More

Category: Philosophy, Psychology, Really, really bad calls

3 Bubbles

I’ve been meaning to follow up on a terrific article from the WSJ last week, titled Why Analysts Aren’t Sure The Bubble Has Fully Burst. The “Three Bubbles” graphic accompanying the article is simply a gorgeous instrument of communication (its here Three Bubbles PDF). E.S. Browning does an admirable job soliciting a variety of viewpoints…Read More

Category: Finance, Psychology

The Skeptic’s Guide to Stock Tips

Category: Apprenticed Investor, Investing, Markets, Psychology, Rules, Trading

Popular or Best?

This was originally published at About This Particular Macintosh, January 1998. ~~ I recently had a computer purchase discussion with my sister—She and her husband would like to have a PC so that Jake and Jamie (my niece and nephew—ages 2 1/2 and 4 1/2) can learn computers and have some fun. Every time the…Read More

Category: Film, Media, Music, Psychology, Technology

BusinessWeek: The Death of Equities

Money & Banking August 13, 1979, 12:01AM EST The Death of Equities How inflation is destroying the stock market On July 23 institutions that manage pension fund money began operating under a new and far more liberal interpretation from the Labor Dept. of what is a prudent investment under the Employee Retirement Income Security Act…Read More

Category: Financial Press, Markets, Psychology, Think Tank