Posts filed under “Technical Analysis”
This weekend, we are in Chicago for a family event. After dinner (over Kir Royals), we discuss the economy, tax cuts and Oil. The subject of whether Oil is a bubble comes up. What’s become a now standard argument — that Oil, inflation adjusted, is relatively cheap (see chart at left) — gets made.
My B-in-L Bob, a very senior BP exec (now retired), is the one who initiates the "Oil is a bubble" discussion. All the inflation adjusted charts seem to only go back to include the 1970s — and that’s not far enough to show the true price trend of oil. Bob argues that Oil has been in a very long downtrend, and the 1970s price spike was an aberration. So too, the 2003-05 run up. A longer, inflation adjusted chart would reveal that the present spike is aberrational, and unlikely to be sustainable. I am somewhat incredulous of this claim.
His point however, is well taken. While he is expecting an eventual mean reversion, simply base dupon price, I have a similar expectation based upon market cycles. The next recession (there’s always a next recession, just as there’s always a next recovery) will see reduced demand for Oil, and that will allow prices to fall.
By coincidence, an article in the NYTimes the next day has this chart in it of the real price of Gasoline for the past century. Surprisingly, it supports Bob’s position pretty well:
Graphic courtesy of the NYT
Let’s look at this technically: This chart is of a very long downtrend. There was a minor spike in the 1930s, which eventually reverted back to trend. There was a major spike in the 1970′s; It subsequently collapsed in price some 50%, from $3 / gal to $1.50, over the 1980 to ’84 timeframe. It would not be outrageous to call that price action bubble-like.
This certainly supports the argument that Gasoline/Oil prices are unsustainably high at present, and will eventually revert back to trend. However, as the prior two spikes make clear, the key is the word eventually. It typically takes about a half of a decade or longer for this mean price reversion to occur. With Oil prices still in an unptrend at present (i.e., no reversals indicated yet), this implies that $30 a barrel (real) oil may be a phenomenon no sooner than 2010. Work that data into your econometric models — high oil persisting at least another few years — and the 2006-2008 period is an even more pronounced recession than I have previously suggested.
Incidentally, consistent with our views on multi variant analysis — a single factor should not get all the credit or blame for major economic or market events — the significant strength of the 1980′s can be as easily traced to the plummeting cost of real gasoline as it could to tax cuts, interest rates, or the stock market. Looking at this helps to explain to some small degree why the 1980s were such a powerful economic period.
At the Pumps and on the Web, Drivers Check for Lowest Prices
NYTimes, August 13, 2005
The Plot Thickens
UP AND DOWN WALL STREET
Barron’s MONDAY, AUGUST 15, 2005
Don’t be fooled by the title to this piece: "Tracking the Elephants" could just have easily been named "The non Technicians Guide to Technical Analysis (in two parts)." The idea was to reveal to fundamentalists a few of the more significant ways they can use charts to improve their results.
Here’s the ubiquitous excerpt:
"Here’s an interesting question: If you could look at one and only one source before buying your next stock, which would you choose: a fundamental analyst’s report (with no charts in it), or the chart of your choosing? While I like having access to both, I cannot ever imagine buying something without first looking at the chart.
And so we wade into the ongoing battle between technical and fundamental analysts. Frankly, it’s one of the sillier debates in investing. But I’ve heard so many bad arguments and misleading theories about technical analysis that I decided to weigh in."
Before we wade too deeply into the controversy, ask yourself: "Why do I need to choose?" Why wouldn’t you use any tool that can be shown to have value? You wouldn’t build a house using only a hammer, but no drills or saws. Why limit yourself away from a tool that can assist you as an investor?
In the column, I used a chart of Ford — but it could have been just about any company , from JDSU to Lucent to World Con or Enron.
click for larger graph
Prior columns can be found here.
To keep the column a modest length, a discussion about Janus Funds
selling of AOL Time Warner was edited out. For your reading
pleasure, that section is here.
StockCharts.com’s Chief Technical Analyst, John Murphy, has created another set of trading rules: “Ten Laws of Technical Trading:” “Which way is the market moving? How far up or down will it go? And when will it go the other way? These are the basic concerns of the technical analyst. Behind the charts and graphs and…Read More