Oil Rallies, But We Prefer Gold


"Overall, we prefer gold, where the current extreme pessimism offers better risk-adjusted upside."

We are strong believers of sentiment as a tool in helping to time buys and sells correctly. By using the Ned Davis Research Crowd Sentiment Poll for Energy Futures we can see that historically, by buying oil when sentiment was 42.4 and below, annual gains would be 14.9%, compared with buying oil when sentiment is above 67.8, resulting in an annual loss of 6.7%. Between the two the annual gain has been 7.4%.

With oil breaking out to a new 2009 rally high this morning ($73.98), we thought we would bring readers up to speed with regard to investor sentiment towards oil. We can see from the chart below that monitoring sentiment in the oil patch since the uptrend began in 1999 with oil priced at about $12 has benefited investors. Last summer when oil was climbing its Icarus path towards $200 a barrel, oil reached its highest extreme optimism sentiment at 85.3 and its "Surprising—Not!" collapse to $30.8 resulted in sentiment falling to a near record low in pessimism at 19.6.

Oil's current reading is 46.7, places it in the middle of the sentiment band. So there is plenty of head room for sentiment in oil to rise to its peak average, since 2002, of around 77.1.

Long term we remain bearish on oil and believe it will retest the 2009 lows by the end of 2010. Short term we concede that the post bubble rally still has legs and there is no sign of a top forming. However, it does feel like a last hurrah break out (or an "Elliot 5th Wave Up").

Overall, we prefer gold, where the current extreme pessimism offers better risk-adjusted upside.

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