Food for thought
Posted: Fri Apr 29, 2016 5:58 pm
Below are comments from an e-mail sent to me by one of our members in Dallas that has been in the oil & gas industry for many years. I agree 100%. Oil, gas and stock prices are not driven entirely by the fundamentals. Speculators and fund managers drive prices in the short run. Fundamentals do win out in the long-run. - Dan
The market does not move on fundamentals…..exactly. It moves based on investors opinion of the fundamental outlook. They are placing bets on the future. In addition investors (really the large funds and institutions) have portfolios of money and they are constantly reallocating that money. The recent move in oil stocks is a good example. For a couple of years portfolio managers have been removing money from energy and selling the stocks. That always happens in bear markets. It causes the valuations to become far out of line, regardless of the longer term outlook. So the volume of stock for sale far over weighted the stock to buy. This technical side of the market was in control which is especially true at significant lows or highs.
The rise that oil stocks have just seen was the exact inverse of what we saw on the way down. Institutions realized they were under allocated to energy and that China was not in a depression and that OPEC had maxed out their capacity. In this case oil basically had nowhere to go but up. With institutional portfolios now too light in oil they pushed the stocks higher, far above the short term ranges. This is the way bottoms happen and normally there comes a period of digesting the 50% moves off the bottom.
My guess is that the stocks will de couple from oil prices for awhile and digest. If oil follows the bullish projections the stocks will move up again. But at the end of the day all markets are made up of supply and demand. Some of your members are from the oil industry and forget that these stocks do not always reflect the actual picture of what is happening in the company, both good and bad.
The market does not move on fundamentals…..exactly. It moves based on investors opinion of the fundamental outlook. They are placing bets on the future. In addition investors (really the large funds and institutions) have portfolios of money and they are constantly reallocating that money. The recent move in oil stocks is a good example. For a couple of years portfolio managers have been removing money from energy and selling the stocks. That always happens in bear markets. It causes the valuations to become far out of line, regardless of the longer term outlook. So the volume of stock for sale far over weighted the stock to buy. This technical side of the market was in control which is especially true at significant lows or highs.
The rise that oil stocks have just seen was the exact inverse of what we saw on the way down. Institutions realized they were under allocated to energy and that China was not in a depression and that OPEC had maxed out their capacity. In this case oil basically had nowhere to go but up. With institutional portfolios now too light in oil they pushed the stocks higher, far above the short term ranges. This is the way bottoms happen and normally there comes a period of digesting the 50% moves off the bottom.
My guess is that the stocks will de couple from oil prices for awhile and digest. If oil follows the bullish projections the stocks will move up again. But at the end of the day all markets are made up of supply and demand. Some of your members are from the oil industry and forget that these stocks do not always reflect the actual picture of what is happening in the company, both good and bad.