Oil Rallies, But We Prefer Gold

We are strong believers of sentiment as a tool in helping to time buys and sells correctly. By using the Ned Davis Research Crowd Sentiment Poll for Energy Futures one can see that historically, by buying oil when sentiment was 42.4 and below, annual gains would be 14.9 percent, compared with buying oil when sentiment is above 67.8, resulting in an annual loss of 6.7 percent. Between the two the annual gain has been 7.4 percent.

With oil breaking out to a new 2009 rally high this morning ($73.98), we thought we would bring readers up to speed with regard to investor sentiment towards oil. We can see from the chart below that monitoring sentiment in the oil patch since the uptrend began in 1999 with oil priced at about $12 has benefited investors. Last summer when oil was climbing its Icarus path towards $200 a barrel, oil reached its highest extreme optimism sentiment at 85.3 and its "Surprising-Not!" collapse to $30.8 resulted in sentiment falling to a near record low in pessimism at 19.6.

Oil's current reading is 46.7, places it in the middle of the sentiment band. So there is plenty of head room for sentiment in oil to rise to its peak average, since 2002, of around 77.1.

Long term we remain bearish on oil and believe it will retest the 2009 lows by the end of 2010. Short term we concede that the post bubble rally still has legs and there is no sign of a top forming. However, it does feel like a last hurrah break out (or an "Elliot 5th Wave Up").

Overall, we prefer gold, where the current extreme pessimism offers better risk-adjusted upside.

Disclosure: No Positions.

Comments

[Larry House:]

I'll take both of them as long-term holdings.

Aug 21 02:40 PM

[BullnBear:]

The dollar isn’t being supported and thus you are seeing an increase in oil any many other commodities across the board.

I’m with the previous comment as well; own them both but keep your attention on the trading action.

If the dollar begins to get some support we may get an oil pullback.

Aug 22 11:11 AM

[User 468857:]

How can I track the bds crowd indexes?

Aug 22 11:44 AM

[User 468857:]

How can I track the NDR Crowd sentiment poll indexes?
Thanks

Aug 22 11:46 AM

[whidbey:]

Why pick? Gold is moving into favorable seasonality and the IEA has declared oil more scarce than was thought.

The problem with oil is the recovery, it is riding an expected recovery in demand soon. I don't see that and I am concerned that the speculation is wrong and it will lead to another bloody nose.

Have a great day.

Aug 22 04:56 PM

[toobad41:]

Did I miss something? I did not see anything that mentioned why you prefer gold except in the last sentence. No graphs, no recommendations, nothing.

Aug 22 08:00 PM

[nmelendez:]

I believe he explained better why he did not like oil. I am of the same opinion, but for my own reasons.


On Aug 22 08:00 PM toobad41 wrote:

> Did I miss something? I did not see anything that mentioned why
> you prefer gold except in the last sentence. No graphs, no recommendations,
> nothing.

Aug 23 10:59 AM

[fe02:]

The question that I am currently struggling with is one of the correct weighting between the two. I do not view it as an "either or" proposition. Does anyone have any thoughts on relative weightings?

Aug 23 09:53 PM

[Beacon Asse...:]

You can track NDR sentiment charts in our Seeking Alpha articles or on our web site's Blog:beaconassetmanagers.co...

For more detailed information contact Bruce Kaminsky at Ned Davis Research at 800-241-0621

Aug 24 03:30 PM