Beware of “flying monkeys.”
Apropos the current strength in the market, the common refrain amongst traders and analysts interviewed on these shows goes something like this… I don’t believe in this market’s strength, but I want to participate while it lasts.
Got that? Traders are so desperate that they are now buying, not on fundamentals, but rather on fear of missing out before this market heads back into the toilet.
Our concern is this: with each passing session it appears more traders are encouraged to “participate”, hence, the market keeps moving higher. That happens enough times and soon you have $100 oil and Matt Simmons all over the tube alleging the Saudis are doctoring their books and that Petrobras and ExxonMobil didn’t just find all of that oil in Brazil. Then, just like we saw last spring, when the price path of the market decouples from the fundamentals, perception trumps reality and high prices become the justification for higher prices. All because the smart money [sic] doesn’t want to “miss out”. So go ahead, buy. We would not want to deprive anyone from missing out. Just beware. Sooner or later we are going to walk into our offices and this market will be lock-limit down. -, Thursday, March 26th, 2009
Indeed, since we wrote that August WTI on the NYMEX rallied from 58.07 to 73.48 high (+26½%). Be that as it may, a very interesting development has been accruing over the last three weeks. Despite the introduction of numerous bullish headlines…
- Extant fallout from the Iranian elections
- Stepped up civil strife in Nigeria
- U.S. dollar weakness
- Passage of H.R. 2454
And the latest headline to hit the wires… the Kremlin’s commemoration of its August 2008 invasion of Georgia – i.e. the Kremlin’s staged demonstration of its ability toseize the BTC and Poti – by staging a massive war game on the Georgian border last week. … despite these headlines, the bulls on the NYMEX have failed to take out the high from June 11th.
On the other hand, the bulls on the ICE did manage to take out its respective June 11th high in the Brent market, but that was only because PVM had to liquidate 9,000 contracts of “unauthorized” trades in Singapore last Tuesday (is Nick Leeson working for PVM nowadays?)
In this vein, the exuberance that spurred the rally in equities, and by extension, commodities, was fueled by what Harvard’s Neil Ferguson described last week on Bloomberg TV as wishful non-thinking. We could not agree more… though it chaffes us to agree with someone from Harvard.
As noted in back in March, large upstairs traders and their flying monkeys on the floors of the NYSE and NYMEX decided the recession was over. They were tired of the market going lower, they were bored with giving the same story day in, day out to Mark Haynes, they needed some excitement in their lives… not to mention larger commission checks.
So, based on nothing more than some non-customary stock picking advice from the White House, they started buying. And, given that the economic view was so dire, their buying was met with little resistance. As more and more money was encouraged to participate, the market moved higher and higher. Thus, what started out as a bear market rally was all of sudden being spoken of in terms of V-shapes and second derivatives. In other words, the market was convincing itself that initial signs, i.e. green shoots – suggesting the worst of the recession was over were instead, actual signs the recession was over and pent up demand was about to surge.
What proof did they have? The market was going higher… and therefore they went on a buying spree because once again, high prices were the justification for high prices.
Stephen Schork is the Editor of, and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.