Two Reasons To Own Crude Oil - Not Just Because Of The Weak US Dollar

This isn’t another article about the Dollar is down and everything else is up trade. In fact, if we look at crude oil, it really hasn’t done anything over the past 4 months. This is in contrast to the S&P500, which is up over 11% since June. Crude oil is up over 100% from its February, 2009 lows, but it really hasn’t benefited from the Dollar’s down slide. So what gives?

The obvious reason to own crude oil is that all assets dominated in dollars should move higher as long as the Dollar Index shows no sign of reversing its down trend. But the obvious doesn’t always work when it comes to the markets, and it hasn’t worked for crude oil. Nonetheless, I believe crude oil is poised to move higher despite its 100% gain this year and despite the fact it has lagged during this phase of Dollar devaluation.

Reason #1: the launching pad

Figure 1 is a weekly chart of West Texas Crude (cash data). The indicator in the lower panel is based upon Larry Williams’ “Pro Go” indicator. The idea behind the indicator is to identify those times when retail traders are dominating the market action. With the indicator at extremes, the retail trader has been involved with crude oil for the better part of the year. (Note: good for them.) However, it is in these kind of extremes that the “smart money” or strong hands takes shares off the weak hands. Past extremes in the indicator are noted with the maroon colored vertical bars. In essence and despite the 100% move in crude oil over the past 8 months, I believe that crude oil is on the proper launching pad to move higher.

Figure 1. Crude Oil/ weekly

Reason #2: sentiment

Figure 2 is a weekly chart of West Texas Crude (cash data), and the data in the lower panel comes from the Market Vane Corporation, which publishes the Bullish Consensus. The value isn’t near prior extremes but the current value of 39% means that only 39% of newsletter writers and advisors surveyed are bullish on crude oil. From a contrarian perspective, I like that. This is not a crowded trade.

Figure 2. Crude Oil/ weekly

So within the context of moderately bearish sentiment and within the context that the “smart money” is positioning itself for a move higher, I believe crude oil could move significantly higher over the next couple of months. This analysis does not consider any fundamental, supply demand issues, or geopolitical concerns. These factors, while out of my scope of expertise, may be relevant.

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