Be Cautious in Tough Markets

11/16/2012 11:44 am EST


Jim Jubak

Founder and Editor,

The recent drop in oil prices may have been a delayed reaction to next year's demand outlook, but MoneyShow's Jim Jubak stresses that it is important not to overreact.

On November 7, the day after the election, oil fell. The price of oil went down. Now, why?

One of the reasons I am asking about this is not so much I am interested in oil, but I am interested in what goes on in the market when you have a lot of big market-moving events, like a US Presidential election, a Greek vote on whether Greece gets the next stage of its bailout, Chinese turnover in government.

So oil fell. One of the things that happens is you get kind of a crowding-out effect. The market really, in terms of trends that are noticeable, can’t produce more than one or two at a time.

So what you had on the day of the election, the day before this big move in oil, is you had the US Energy Information Administration coming out and saying "We’re going to do a new projection for demand for oil in 2013, and we’re going to say it is still going to grow but it is going to grow at a slower rate than before." In other words, demand is down.

Now, all things else being equal and it was a slow news day and we weren’t looking at everybody getting caught up in the Presidential election, that might have been the driver for oil prices to decline. Is it the driver for oil prices to decline on the next day, when you have sort of taken some of these big-burner macro events off people’s minds?

I think so. I think what you are getting is a delayed reaction…but that is just my opinion. The problem right now is that you have so much going on that the market is very, very choppy. There is no strong trend in any direction; rather, it is very hard to figure out the chronology of cause and effect in any of this stuff.

It is a really, really difficult market, and you need to recognize that and say, "OK, I really don’t know what is going on, there are no strong trends, I am seeing lots of price moves but they are not giving me a whole lot of information."

Especially because, if you remember, way back before Tuesday the 6th, the end of the week before that, we were talking about things like the Nasdaq being oversold and whether we might get an oversold bounce, and stocks moving into oversold territory and that could stay oversold for a while. All of those trends are still continuing. That is the larger trend behind all of this stuff.

When the larger trend moves in front of the short-term stuff and becomes the big trend is, of course, right now, the major issue. Oversold markets can continue to get oversold, so we could continue to go down. Right now, what we have is chop, no trend, and it is very easy to decide that you know what is going on and, therefore, react to it when you really don’t.

Related Reading:

What's Holding Back Gulf Oil

Pumped Up Oil Stocks

Why Crude Oil Should Be $50

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