There are many calls for a new bear market in stocks; I don’t see it just yet. In my opinion, several pieces of the recession puzzle are out-of-place. Nevertheless, the bearish dialog encouraged me to go back and reevaluate the charts. In doing so, I uncovered an interesting observation in oil. Higher oil prices along with rising interest rates trigger most recessions. But before oil spikes to recession-level highs, there is almost always a washout period (like now). If this pattern repeats, oil should bottom in Q1 2019, and potentially begin a 300%+ rally lasting 18-24 months.
Moreover, oil tends to form major bottoms at the tail end of years that end with an eight (1988, 1998, 2008/9, 2018/9?). The 2008 bottom arrived in early 2009. Each time prices bottomed at or just below the monthly Bollinger band (red ovals). From there, prices enter a sharp 300% advance.
Note: The 2007 washout low in oil didn’t arrive in an “eight-year,” but it still preceded a recession. Prices bottomed below the Bollinger band at $50.55 and rallied 291% in 18-months. That was more than enough to thrust the economy into the “Great Recession.”
Current Thoughts: I believe oil will continue lower (maybe a bounce here or there) and reach a final low in early 2019. We will know more after Thursday’s OPEC meeting. The current breakdown in the CRB supports this outlook. From the 2019 bottom, I think oil could enter an explosive rally lasting 18-24 months. Surprisingly, the rallies out of 8/9 lows were very close percentage wise (339%, 346%, and 342%). A similar 340% rally into late 2020 holds the potential for a $130+ oil prices - depending on where we bottom.
Of course, this is all speculation, but I think it’s worth further examination. If the 8/9 Oil Phenomenon repeats, the prepared investor could earn some serious profits. When the time comes, I’ll look to buy UWT, ERX, and 2021 calls options/spreads in XLE.
AG Thorson, CMT
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.