Wednesday, March 9, 2011

Oil Price

Everyone is talking about the oil price as this is the crucial factor that determine the direction of the stock market now. So I asked a group of audience recently at what price they think the oil price will create a panic selling for stock investors. I told them to think carefully before giving the answer as this is a good way to train their “psychic power” in predicting the direction of the market. Many say around US$100 – US$140 should create havoc selling.

I asked them again: “So you think when the oil price is near the historical high of US$147, investors will get panic and cause the stock market crash?”

In fact, in my personal view, the oil price should reach US$200 and beyond before investors get jittered. Then the audience grasp in disbelieve – too high!

Let me explained further, according to the behavioural finance this phenomenon is known as the “anchoring effect” whereby people usually refer to one reference point and make judgment from there.

When the oil price is near historical high level, the market participants may not feel the shock because they have seen this price level before and it’s within their expectation. What usually cause a stock market crash is that things happened in an unexpected way, which is beyond people’s expectation!

So to me, the oil price must be significantly higher than the previous high level, in order to stir some emotional reactions from the market participants.

Moreover, whether the oil price will go higher largely depends on the development in the Middle East war. If we think the war will end in the near term, then the market will be bullish. However, if this event progress like the wild fire causing widespread of upheavals, then I think we should start to take profits now.

For now, my strategy is short term play. And remember to take some profit along the way because we want to minimize our risk exposure in an uncertain market.


Happy investing,
Pauline Yong

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