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Thursday, March 23, 2017
Two weeks ago, I told subscribers of my high-priced True Wealth Systems service to bet against oil...
Subscribers are already up double digits. But the fall in oil prices is just beginning...
Why did we bet against oil?
Last month, bullish bets on oil hit their highest level in history. It was the popular trade.
But a popular trade is often a crowded trade – one that's nearing a top. That's because when everyone who wants to buy is already in, no one is left to push prices any higher.
So instead of being fashionable and joining the crowd, whenever I see an extreme like that, I like to do the opposite.
We can see today's sentiment extreme most clearly in the Commitment of Traders (COT) report...
The COT report tells us what futures traders are doing with their money. And it's a fantastic contrarian indicator when it hits extreme levels.
Last month, it showed futures traders were more bullish on oil prices than any other time in history. And prices are down since then.
Bullish bets have come down a bit as well. But as you can see from the blue line on the chart below, folks still haven't given up on oil...
What does this mean going forward? To find out, let's take a look at the last two times traders were this committed to higher oil prices...
Bullish COT bets on oil last peaked in mid-2014. You know what happened next... Oil prices crashed by 50% over the next six months. And they ended up falling 75% to their bottom last year.
Let's look further back...
In 2011, the oil COT broke out to a then-all-time high. Bullish bets peaked just before oil prices did. Oil rose for another two months... then crashed 30% in five months.
In short, it's dangerous to bet on higher oil prices after a bullish extreme in the COT.
Recently, the COT broke out above its 2014 high... It hit a new all-time high in December and has climbed consistently since then.
This is NOT a good sign for oil prices. It tells me that oil is a crowded trade.
It's hard to know exactly how far prices could fall based on sentiment alone. In 2014, similar sentiment led to 75% declines... But in 2011, oil prices "only" fell 30%.
Oil is already down 13% from its recent peak. And I wouldn't be surprised to see oil fall another 15%-20% from here.
That means the smart bet today is still on lower oil prices.
"A powerful warning sign is flashing right now..." Steve wrote at the start of this year. The last time bullish bets on oil reached an all-time high, prices crashed dramatically. Learn why futures market extremes are such a good indicator right here: This Extreme Warning Sign for Oil Prices Is Flashing Again.
"Crude oil is breaking down," Justin Brill says. He explains exactly what's happening with oil production today and how it's affecting prices. And he expands on why Steve believes we now have the perfect setup to bet against oil. Read more here: Here's Why Oil Prices Are Plummeting Today.
VALEANT'S BIGGEST BULL GIVES UP
Today's chart highlights an 18-month disaster for billionaire investor Bill Ackman...
In March 2015, Ackman's Pershing Square Capital Management started putting billions of dollars into Valeant Pharmaceuticals' (VRX) stock. The fund became one of the drug company's largest shareholders. Initially, shares climbed, reaching a peak around $262 in August 2015. But shortly after, the bad news rolled in...
Many started to question Valeant's business and accounting practices. The company was criticized for buying the rights to existing drugs and treatments, then immediately raising the prices. And some short sellers alleged outright fraud in its accounting department. The stock began to plummet...
Shares are down nearly 96% from their peak and are trading at a multi-year low. So last week, Ackman finally threw in the towel. His fund sold all its Valeant shares for $221 million... resulting in a loss of around $4 billion. A simple trailing stop loss could have saved Ackman billions. Don't make the same mistake with your investments...