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Identifying Bubbles and Mini-Bubbles


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Identifying Bubbles and Mini-Bubbles

 

bubbles-final.jpg

 

OIL : here's a detailed discussion about a possible Mini-bubble in Oil in Summer 2013:

 

Oil has been "locked" Long for weeks

 

Market "locking" is a defining characteristic of a bubble, according to market researcher Didier Sornette. This occurs when the normal diverse opinions of market participants shifts to unanimity, and most market participants have the same bullish view.

 

We have seen this characteristic in the Oil market until the latest week, according to an article ("Bursting the Bubble") published by Reuters.

 

Here's etf for US Crude Oil, where the "lock" may be less clear than Reuters says it is in the WTI Crude market :

 

USO ... update/ compare: OILB

fl.gif

 

Chart Comment:

USO broke "out of a box" in July when it crossed $37 (x2.80 = $103.60 WTI equivalent), and eventually stabilised above that level ... The break of the 377d-MA at about $35 (x2.80 = $98) on heavy volume preceeded that breakout

 

The Reuters article claims a "Mini-Bubble" :

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+ The action in the crude market as all the hallmarkets of a mini-bubble... with so many fund managers positioned long,

+ "A trimming of long positions by hedge funds and money managers could be a sign that action in Syria could be a sign that action in Syria may send crude price tumbling."

+ Between June 6 and July 23, US light crude rose by nearly $14 per barrel, and Brent futures were up $5,

+ Spec Longs (hedge funds, etc) rose from 258 mn Bbls to 401 mn Bbls in WTI futures, and from 164 mn to 188 mn Bbls in Brent,

+ The Ratio of Spec Longs to Shorts, doubled from 4.5, to 9.3 in WTI, and from 3.9 to 4.6 :1 in Brent,

+ But more recently, those positions have been trimmed somewhat. By August 20, Spec Longs in WTI were back down to 361 mn, retracing 28% of the rise, and the Ratio is down to 7.1 :1.

 

Those with a "lock" mindset may be looking for an exit very soon:

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+ In early August, there were 115-120 Specs holding "big" positions above the 350 contract reporting limit,

+ Over the last six years the number of Big Long positions has ranged from a Low of 51 to a High of 162, and that 162 peak was hit in March 2011, only a few weeks before the Oil market "crashed" on May 5, 2011. Over the entire period, the number of Big Longs averaged 100,

+ In early August, the number investing long was way over the average, and the average Big Spec had 3,500 cts (= 3.5 million Bbls) long,

+ Soc Gen expects a further rise of $5-10 per barrel in the next few days to $120 (/2.8= near $43) to $125 (/2.8= near $45). And they do not rule out a spike to $150 (/2.8= $53+)

+ Many hedge funds may see that spike as a great opportunity to reduce long positions, and take profits on what they are holding,

+ The old saying, "Buy the rumor, and Sell the fact," may be sound advice here.

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The importance of market LOCKS and PARABOLIC moves

 

The same Reuters article has more detail, saying that Didier Sornette, of the Swiss Federal Institute of Technology, wrote about Bubble behaviour in his 2003 book, entitled: Why Markets Crash.

 

He said that "Locking" behaviour preceeds bubbles, and this behaviour, on both the Long and Short side can lead to explosive price moves.

 

"Once the market locks, price moves tend to accelerate, until the market moves far out of line with fundamentals, and at least some market participants attempt to bailout (in a hurry), sending the market into an equally brutal reversal."

 

"Locking and exponential price moves are usually a sign that the end of a rally or crash are near, though not necessarily in terms of price."

 

"The question is whether the current mini-bubble is near to its fullest extent, or will inflate further..."

 

I reckon that the end of parabolic moves may be easier to identify than moves like the one we have seen so far in the Oil market.

 

Here's the WTI Crude chart over the last 3 years:

 

xd2f.png

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I reckon that the end of parabolic moves may be easier to identify than moves like the one we have seen so far in the Oil market.

 

One way to identify the end, might be by counting the Waves.

 

bny.gif

 

The "Lock Period" identified below should be a Wave-3 move, and it seems we are now in Wave 5, with the small 5 wave part of this Wave-5 yet to come.

 

Perhaps that will come in a gap up, which is quickly reversed. Or maybe it will get extended

 

ANOTHER WAY : By comparing Commodity price moves with Stock Prices moves.

 

Here's the Oil Price (represented by USO) versus Oil Stocks (represented by XLE) ... update

 

cnu.gif

 

The most recent move in Oil has not dragged Oil shares up with it, suggesting that the fundamentals of the Crude Oil move may be getting ahead of fundamentals.

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