While Goldman has been aggressively warning about the upside risks to the market in days most recently over the weekend, so far none other than Dennis Gartman has been proven right with his recent call for a "melt up", something the S&P has been quite willing to oblige on. As such, while some may argue that his latest call to jump on board the crude train may be just the catalyst to sell the recent OPEC optimism-driven break out, perhaps his lucky streak will extend to yet another asset class.
His argument, as laid out in his overnight note:
CRUDE CONTINUES WITHIN ITS WELL BOUNDED CONFINES that have developed over the course of the past several months but there is a subtle change beginning to take place as the bullish and bearish “armies” are now shooting at one another from very close range. Until quite recently, the ranges for Brent and WTI had been bounded with $4/barrel since December of last year, but over the course of the past two weeks those ranges have been constricted even more severely and are barely more than a $1/barrel from inter-day highs and inter-day lows. The longer that this constriction of range takes effect, the more material shall be the run when one side has clearly vanquished the other.
Our bet at this point is that the bullish forces prevail, and we say this despite the fact that so much has been made of the rising level of “spec” longs in the market and despite the fact that the rising level of “commercial” shorts has reached new all-time highs. The latter has been reached for the simple reason that inventories of crude above ground and on-board ships are higher than at any time in the past forty years, but those inventories are now hedged with forward futures sales to have locked in the contangos that are now disappearing. As the commercials hedge their inventories, “specs” are taking the other side of the trade and open interest is expanding… a thesis our friend Dr. Philip Verleger has continued to write about and a thesis we wholly support.
What is important to us is that as inventories have risen and as drill rig counts have done so also… news that should be manifestly bearish of crude…crude prices have held firm and actually have begun quietly to rise. This has been accompanied by a material narrowing of the once very wide contangos in Brent, WTI and Dubai crude futures. As we have said countless times in the past, if the news is bearish and prices won’t break… and if the term structures are moving bullishly… then it is manifestly unwise to be bearish and it is at least tacitly correct to wax bullish. We are moving in that direction. We’ve really no choice.
Which leads Gartman to a...
NEW RECOMMENDATION: Following our discussion above regarding crude oil we wish to buy one unit each of Brent and WTI crude upon receipt of this commentary. We’ll risk no more than 3% from the current prices level and if nearby Brent were to trade above $57/barrel and if nearby WTI were trade above $55/barrel and were to remain there “For an hour or so to prove the merits of the moves” we’ll willingly add to those positions.
Will Gartman's reco prove to be "manifestly unwise" or will he continue his recent streak: check in a few days for the answer.
Incidentally, those wondering what Gartman thinks about the overall state of the euphoric market, here is the answer:
As we have said many times in the past, the “game” of investing is so very like the childrens’ game of “Musical Chairs.” The music is still playing loudly and well; all are dancing and circling the chairs and it seems, for the moment, that the music shall last forever. However, when the music does inevitably stop… and it will… all will suddenly dive for the chairs in the middle of the circle and there shall always be one or two participants who find themselves chair-less. Things then grow ugly. Large profits become smaller and small profits become losses.
Finally, while clearly unaudited, Gartman reminds readers of his newsletter that "we are +6.3% for the year-to-date, having suffered two days of small losses late last week."