My father used to tell me that "a little inflation is a good thing." I never fully understood this, but I'm guessing I'll soon find out why.
The May contract for oil went negative, way negative-closing at -$37.63. This means that people will pay you to take oil off your hands. We’ll have to see how it unwinds. One thing that I do know, is that extreme deflation like this is not good. I’ll leave it to the economist to explain the details. Here is a good primer. Just know that falling asset prices is not good for the economy. Deflation is one of those features that comes with a recession. I apologize for saying the “R” word. Is the oil thing just an aberration? Is this some extreme unwinding for people “on the hook?” Or, is it the start of something bigger? It’s probably a little of both, but let’s not make any big picture prognostications. It is a piece of the puzzle, but the puzzle is massive. Not to mix metaphors, but let’s not try to connect all the dots just yet.
In times like these, I try not to think too much and just look at the charts. They’ll be a lot of “whys” that unfold after all is said and done. I see that the stock futures are getting hit hard pre-market “because” of oil. This may be the case or it might be something even bigger.
As I wrote in yesterday’s bear market update, the market will do the most obvious thing in the most un-obvious manner. It will do what it has to do to trick, fool, and frustrate the most before doing the most obvious. I woke up thinking, you're probably wondering: Why not just do the “obvious” and hold on? The problem with that, channeling Keynes, is that the market can stay irrational a lot longer than you can stay solvent. Sometimes, you have to fight and run away so that you can live to fight another day! Let's look at this irrational behavior:
If a market is "obviously" headed lower, it'll have one massive shakeout and fakeout before continuing lower. In this pain phase, shorts will be squeezed, bottom fishers will be sucked in and spit out, and the buy and hope crowd, after their brief sigh of relief, will have to make some really tough decisions.
So What Do We Do?
Hippocrates' "Primum non nocere" aka the 'doctor's creed:' "First, do no harm" comes to mind. If this is your first bear market, you have a wonderful opportunity to learn. Just be careful when putting money into harm's way. For the seasoned trader type, the short side remains the "obvious" side to play. Obvious does not mean easy. Bill Dunn once equated trend following to riding a bouncing bronco. I think trend following in a bear market is like riding a psychotic bronco. It's going to be bumpy-that's one of the few things that I can guarantee!
May the trend be with you!