Biting the Bullet with a Put on Continental

The most negative indicators remain those related to gold and oil the resources and gold and oil stocks. That’s tough for me in that I’m decidedly bullish on both gold and oil over the longer term.

Still I decided to bite the bullet this week with a put option on Continental Resources (NYSE: CLR). Betting against Continental – though it likely will be only for a short period – is a double whammy for me. Not only does it fly in the face of my geopolitical assessment of oil’s future, it also to some extent is a bet against economic stability.

Shale oil is one of the few sources of incremental oil supply the world is counting on. And incremental supply is especially critical today given that world demand for oil is currently increasing roughly 50 percent faster than the 20-year average rate. Any talk you may have heard about peaking demand is just that – talk.

Despite the rally in oil prices, though, oil services companies that reported earnings last week noted that North American activity was less strong than expected. In other words, activity in the shale patch didn’t ramp up to the degree anticipated based on higher prices. I still expect shale activity will pick up within the next couple of quarters, but at least for now our negative indicators on oil stocks and the poor reading on oil the commodity point to the kind of pause that many of the service companies indeed seem to be experiencing at present.

But keep in mind that with the longer-term background conditions very bullish for oil and not bearish for oil stocks, there could be some quick changes in our positions. So make sure you stay abreast of our updates and recommendations.

Our put option on the SPY is informed by a still “positive” reading for our VIX indictors, a reading that suggests market volatility is on the rise, as in fact seems to be the case. I am also somewhat encouraged by the weakening in our SPY indicator. While neither the SPY indicator nor our VIX indicator has reached an extremely bearish level, taken together they suggest we should stay with our trade a bit longer.

I am also growing more willing to bite the bullet when it comes to gold. Our indicator on the metal would rationalize a negative bet, but the stock indicators are less bearish. I am looking for an entry point but would prefer to have both indicators in negative territory before going ahead. Again stay alert to all our communications to you.

On a final note, we continue to closely monitor developments in China and search for relationships that the massive Chinese economy may affect. As mentioned previously, we have added several variables directly related to China and will probably be adding more. One of the exciting things about indicators is that they are always a work in progress and can always get even better.


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