Keith Richards :
I am very happy to say that we have another technical analyst that is one of the more predominant technical analysts on the scene, especially in Canada. I am very happy to have Greg Schnell with me today, and we’re going to talk about a lot of interesting things. Greg is a real proponent of cyclical rotation and he does a lot of work on commodities and he runs a research firm called a Osprey’s Strategic.
I will confess that I’m officially going to take a subscription to this service. You guys know that I do all of my own proprietary work, but Greg’s research is excellent. So just FYI, I think it’s worth looking into for my viewing audience. Greg also wrote one of the, you guys have seen the “whatever for Dummies” books, and he’s written a Stock Charting for Dummies book. It’s a pretty cool thing that he’s done there so I thought you’d be interested knowing that if you want a basics on technical analysis, Greg’s written the book. So Greg, welcome to the show and let’s have a good meeting.
Greg Schnell :
Hey, thanks for the introduction, Keith. Yeah, I look forward to it. This will be fun. Two techies always talking is great.
Keith Richards :
Yeah, well hopefully we won’t bang heads too much, but I think the greatest thing about technical analysis is we can only expand on each other’s knowledge by offering our own expertise. So, I want to start off, because whenever I do these interviews, I tend to ask my guests for some quick notes on what they might suggest we talk about. One of the things, Greg, that you mentioned is that you went to the CMT meeting in New York, and you met with some bigwigs in the meeting. So, I’d like to hear your thoughts on how that went.
Greg Schnell :
So I’ve gone to the CMT meetings for the last 10 years or so. For me, I’m a technician that works out of wherever I am and that has worked well. But one of the things that I like about the New York meeting is just getting a chance to meet a lot of the senior technicians that have written books and seen different markets over time. Examples might be Ralph Acampora who we call the Godfather of Technical Analysis. He actually painted the Dow on the side of his barn in Minnesota, and he’s done three sides of it with the entire stock market history. But people like Ned Davis and John Bollinger of Bollinger Bands and Luis E. Mata of Market Magic and there’s no other opportunity to meet all of these people, Tom Demark of DeMark Analytics, in one place.
This was the 50th anniversary, so it was very, very special. We went down to the New York Stock Exchange floor and had dinner down there and met with all of these different friends. Bob Pisani was there, and I don’t know if you’ve seen Bob’s new book but he’s got one that says Shut Up and Keep Talking which is a reference to try to keep the show going or shut up, we’re out of time in his ear from his director. So anyway there’s some great history there. But Bob Pisani was there talking about how technical analysis developed from the media side which was another interesting presentation that I found personally very interesting. But there’s a new book out written by Ralph and a few other authors and it’s about the first 50 years of technical analysis, just how difficult it was to start gaining acceptance and now how it’s a worldwide movement. Very, very interesting story.
Keith Richards :
Oh, you know, that’s interesting. You mentioned how Ralph is talking about how difficult it was to have technical analysis accepted. We were talking just before we started this interview and I said, I met Ralph and he actually was a major influencer in my career. I was lucky enough that back in the mid-nineties when I first met Ralph Acampora, he came to Toronto and there was just a very small group that attended a class that he was running. That’s how unpopular technical analysis was. Literally the guy that’s the guru of technical analysis, the Warren Buffet of technical analysis, came to Toronto and like 10 of us went and I got to go have lunch with Ralph. We had a hamburger together or something back then. He’s the guy that literally said, “Keith, go take your CMT.”
It is funny that he’s written that book because I remember I was criticized, and I’m sure you were too, right? I think anybody was because it was the dark art. Speaking of criticism you mentioned in your talking notes that relative strength, you’re not as big a fanboy of relative strength studies as a lot of technical people are and interestingly, I won’t say the name, but I’ve interviewed one of the guests that I’ve had and he’s a big fan of relative strengths. So would you mind sharing your thoughts on relative strength and where it’s useful?
Greg Schnell :
Yeah and the reason I want to help people understand how difficult it is, not that it’s not valuable, but how difficult it is to do relative strength with sector rotation. It’s really, really important that you understand that it’s just as important to leave the trade as it was to stay in the trade and one of the problems with relative strength is it’s very hard to exit near the highs because you still think everything’s strong. So that can be a big issue for us. Let me just give you some examples and probably a few people will know Joe Terranova from Fast Money. So this is the Katie Stockton Strategy on the left, and this is Joe Terranova on the right.
Katie Stockton is Fair Lead Strategies founder, so she’s a big technician, and what you see here is this is her performance basically since the October lows. The same with Joe here. Joe calls his the Momentum ETF. Now he’s got some boundaries, but when you manage an ETF you have some boundaries. So it’s a little bit not quite as fluid as maybe they could do it on their own person. One of the more difficult parts about this market has been that you don’t get broad breadth and with broad breadth, literally it helps all boats rise up. Here we have a market hitting new highs and this is not quite 10%, it’s maybe 5% off prior highs, but it’s probably 15% off where the NASDAQ is.
So just seeing that difference is quite important. I think we’ve all heard of Tom Dorsey Wright. He did a whole bunch of stuff on relative strength and actually he sold his company for a lot of dough to Invesco, I think was the buyer. Here is the price action of the Dorsey Wright Focus Five and basically they own five stocks that are really top out performers and they try to hold them. Over here on the right is the 50, the Innovator IBD 50. So we all think of IBD as being relative strength and William O’Neil, “How to Make Money in the Stock Market”. All of these famous strategies struggled a lot and so here’s the First Trust Dorsey Wright Focus Five.
Really since the middle of 2021, it hasn’t done anything. Now it didn’t have the big pullback in 2022, so it did find relative strength. So you didn’t lose, but you didn’t gain. So in terms of outperformance, it was good, but in terms of underperformance, since the rally started, it’s been trending lower since January. Then over here you just see the IBD Innovator 50. It got caught in that big NASDAQ pulldown and then just hasn’t really been able to get back under because of the narrowness of the market. I want to make it really clear that the strategy does work. When relative out performance is there, it’s really helpful, but it’s so hard to find in real time. One of the things about Fidelity and Dave Keller, who’s with StockCharts.com as their chief technical analyst, and you might remember John Murphy.
So a lot of these people have tried different strategies but at Fidelity, when Dave was working there, they would look for three month relative strength highs, six month relative strength highs, 12-month relative strength highs. What is a relative strength high? So that is this purple area for me on all of my charts everywhere. Any shaded purple area is whatever chart we’re looking at compared to the S&P 500. What you see here is there’s definite trends. This trends lower, and then you can draw a line under this uptrend. For the most part, at least being aware that they’re trying to make higher highs in this, I’ll call it cliff drop here that happened in the middle of this chart. When you look at this, this is kind of how I feel about the NASDAQ right now.
The NASDAQ is just on a straight up path and it’s very difficult for us to time that exit, but there will come a time and I expect it to be a bit of a knife drop just because we’ve got everybody piled into two industry groups, really software and semiconductors. So yes, we’re in one sector or maybe two sectors, but I think the bigger picture with the mega caps might be Amazon and Tesla are over in consumer discretionary, but really they’re part of the technological wave that that went through where they could expand their businesses meaningfully through technology. When you look at the differences of all of those, and let’s just bring up Amazon and Tesla, and what you see here is just going down to this weekly chart. So back here in 2020 when everybody was staying home, look what happened to Amazon. It literally rocketed in out performance because everybody was getting stuff shipped to their house. That made sense.
That trade came to an end and literally you could draw a line under here when relative strength ended and Amazon has not outperformed the S&P 500 for almost two years. That’s just so hard to see because here you see a stock hitting a new high trying to break out to a new high, and yet it’s underperforming all through there. So every time this chart changes, people want to get on board and for good reason. Now for me, what I would do is draw a line across all of this and if we finally saw Amazon start to break out of a new relative strength trend, that would be way more important to me than scanning for some sort of a relative strength signal. Now in this case it’s probably hitting new six month relative strength high, so that’s probably not bad.
A good place to look. Over here on Tesla, what you can see is it was a really strong outperformer while it was getting listed on the S&P 500 and then it went sideways for quite a while. Then actually when it started to drop off back in here, and this is a long way down right, this is $414, this is $314, so you’ve got a hundred dollars in difference. Now the S&P was dropping and Tesla was dropping, so everything was coming down. But the hard part to recognize is that the relative strength game is a valuable function, but it’s very hard to do well, is tahe point I really want to make. It’s really, really hard to do well and you need to have some, I’ll call it, solid method of trying to figure out what signals you’re looking for and when you take them.
I find that’s one of the things that’s commonly overlooked and many people got caught in the energy trade last year. I’ll just go get XOP and OIH and what you see here, if we go down to those same charts, is there was a really nice up trend. Obviously we had the spike into the Ukrainian war where oil supplies from Russia and all that kind of stuff and when we broke that trend line, that was a pretty important one. We pulled back, we tried to rally again, but then you draw a big long trend line under here and this has now been underperforming for almost a year. So many people will talk about how great the energy stocks were in 2022, but in reality it was outperforming, but then all of a sudden Russia invaded and then it went on a real spike and that was the end of the story. So it’s trying to time this spike end as an example of why relative strength investing is so difficult.
Keith Richards :
Okay. Greg, I’m going to bring you back to talk about commodities in a little bit cause I think we share some common beliefs about long-term cycles there. I’m going to just change topics really quickly because this is a topic that I have been ranting about breadth on my blogs. I went on BNN last week and I said, this market has no breadth. I want to hear from your lips what you have to say about what is, in my opinion, a pretty alarming low level of breadth for looking at what the market’s doing right now. And I’d like to hear your opinion on what that means to the market.
Greg Schnell :
So, I’ve got so many different ways to show it and I try to communicate that with my clients all the time because really, it’s hard to see when you see the NASDAQ going to new highs what’s going on but here’s an example. Every week I keep track of how many stocks are up 10%. So those are big moves. How many stocks are up 5%, down 5%, and down 10%. This is December and what you see in December, and the stock market fell in December, was there was a lot more selling than buying and that goes on. Now look what happens to start January 6th. This thing lights up. We’re buying and we’re buying and we’re buying and so I’m telling my clients January 6th, we’re in a big bull market, buy. We get to February and everything’s looking great, and then all of a sudden this just dries up.
That’s really, really odd at the start of a new bull market for this to just go from something to nothing. So now just continue with me. Here’s the month of February and we have a couple of green stabs in here and a couple of orange stabs in here, so that’s fine. We get to March 10th and March 17th. This is around when the banks were starting to fail, Silicon Valley Bank. Then March 31st we finally have a big week of up and then since then we’ve had almost nothing. The majority of weeks we’ve had way more selling than buying and so now we’re into May. Two weeks ago now we had one, but it was really not that much. I mean it was 500 stocks up 5%, so that was good.
I think the S&P was up almost 2% that week. But the majority for the last nine weeks, we’ve only had two up weeks in terms of outperformance and yet the NASDAQ’s gone on making it look like we’re in a skyscraper market. It’s that lack of breadth. The selling underneath the surface is so big. So I think this chart does a better job of explaining just how dramatic it is and making sure that people are aware that, again, not just that the S&P 500 is going. This is an example of over the last week, six days, so it takes from the Friday to the Friday. What you’ll see is, communication services and technology were up relative to the S&P 500 and everything else was down. In absolute terms, how much did they move? Discretionary was actually up enough because Amazon and Tesla actually went up a little bit.
But you can see clear selling. Now if I increase this to whatever, we can look at the dates up in the top left-hand corner, but if we go back to since November the 10th, it looks really positive for these three sectors. But it really wasn’t that way. That only really started to turn on since January. Here’s February and just since February to now, almost every other sector’s negative and two sectors are positive. So the question is, is that a new bull market? What I would argue with all of my might and Bob Farrell, who was at the meeting this year, he just mentioned, you can have a bull market rising up on a few stocks, but that is not the bull market you want because he said it’s like the size of the exit is what you’re worried about.
When everybody’s in only the winning stocks and now they change, the move down is rapid. I’ll give you one quick example here and I just want to use the bullish percent index to show this. On my chart list I go through all these bullish percent indexes. Up at the top is the S&P 500 and why we’re so worried about where we’re at right now, people like Keith and I, is we’re right on this trend line for 14 years, since 2009 to 2023, and the market is sitting on this trend line. Now, I’ve ignored COVID a little bit here. It wasn’t an economic drop until COVID actually hit, and then the government’s all flooded to make sure they stayed in power. So that was fine. When you look at this market, this is the 2002-2003 period, and see how the bulls percent index stayed low?
Then you have the 2008-2009 market where it stayed low, and then you have this that looks like we’ve literally had a tsunami, the charts bouncing all over the place, it can’t get any regularity. That to me tells me that we’re not in the bull market yet. The other thing that I’ll point to is when you look down here on the stocks above the 200-day moving average. Here we are. We get way down with only 10% of the stocks above the 200-day moving average and we start to rally out of it. When you start the bull market, so the 2003 bull market, this thing went to 80 and 90%. It just soared and everything was there and we were up there for like almost a year. It was a party and everybody could get on board. Then we came into 2008-2009 and we fell, and then we tried to rally back about 50%.
That’s literally when Bear Stearns happened, May the 19th, and we rolled down and then we just struggled to try and get any sort of volume of stocks above the 200-day moving average. So the bullish percent index stayed negative. That is taking a point and figure chart and just saying, is it on a column of ups or a column of downs? It’s not quite that simple. It has to make a new low in O’s or down columns in order to be not on a bull market signal. Then, in order to get back on a bull market, it has to all go all the way past the prior column of highs. It gives you a little bit more wiggle room. But what you see is we soared all the way up to 90% and we stayed up there for almost a year.
So that was pretty valuable. What we’ve had here is we had the 2020, we rallied all the way up in 2021, we pulled back in 2022. All of a sudden, in 2023, it looks like we’re off to the races and that was really the NASDAQ bottom, January 6th, and we kicked off. Now here’s the problem. Since then, so this is late January, we have literally made lower highs and lower lows in relative strength for February, March, April and May and we’re sitting here saying, we’re in a big bull market. Well no, that’s not how a bull market starts. This is how a bull market starts. This is how a bull market starts. This is how a bull market starts. We’re sitting here in this really awkward environment where the majority of stocks are going down. We all expect the economy to get quieter.
I think I looked at the Bank of Montreal interest rates the other day, they’re at 6.9%. So for a Canadian trying to hold a mortgage, if you had any variable rate or you were trying to move into a new mortgage, the rates are quite stunning. My daughter’s bought two years ago at 2.49 and 2.99 for five years. So these interest rates are dramatically different in terms of affordability. I look at this chart and S&P 500 has got 44% of the stocks above the 200-day moving average. That says 56% of the stocks are in trouble and yet we’re talking about a big bull market. So I think for the people who are saying software’s in a bull market, I could go with that. Or technology’s in a bull market. Okay, cool. If you had a stool with 11 legs and you cut down all but three maybe two, you’re on a pretty small stool.
So that’s kind of where I find the market and that’s the relative strength and the breadth that we’re talking about. But the important part is right up here in this top corner, if this doesn’t hold, we’re in a pretty big break point like we were in 2008 or in 2001. So it’s that fine line, and I’ve got these for the NASDAQ and the New York composite and the Toronto Stock Exchange but what you see here is this is just like we’re in a very fragile position and to see the bull rants out there from everybody, oh, we’re in a big bull market, just wake up and smell the coffee. I’m smelling the coffee and on Wednesday afternoon at 3:55, I was all bullish.
So at 3:55 on Wednesday, stocks are breaking down and then all of a sudden NVIDIA speaks and we have this big huge rally to end the week and the NASDAQ ends positive and tech takes off. I actually thought on Wednesday afternoon at three o’clock, we were probably going to be a minus 4% week across the board and it literally turned like that on his comments. So are we in a thin market? I think we’re in an extremely fragile one, and I hope it holds up. Again, I’d like the breadth to spread out to the rest of the market and then I could get way more positive. But to me, all of these charts tell me we’re in a fragile state and I’ve got some other examples, different ways to show this over and over. But the critical component for people to understand is this is no Hollywood movie where we’re riding off into the sunset in a new bull market. We’re a long way from there.
Keith Richards :
Yeah, I like what you just said. I think the key message, beyond the fact that, like you said, the stocks on the S& P, the chart you showed a minute ago, are seeing anywhere between 40 and 60% at their 200-days. That’s not a widespread bull market. So you were saying you can call it a bull market in technology, you can call it a bull market in whatever the sector that you’re looking at, but you can’t call it a bull market like a broad based bull market. Greg, I’m an athlete. I’m 61 now, so I’m an old athlete, but I’ve been racing amateurly bicycles for most of my life and never made the pros, just ride as an amateur, but I’ve been successful.
One of the things that happens in road racing is that, and if you watch something like the Tour de France, where the pros are, everybody’s good at one thing. So in the pros they have sprinters and then they have GC guys, so general guys. And what you’d find is that if you look at a bicycle race, and this goes for any sport, but if you look at a bicycle race where it’s a sprinters course, there’s not a lot of climbing. So the sprinters who often are powerful sort of like the tech stocks. They have just nice flat roads that they can sprint and beat everybody because their explosive muscle fibers allow them to beat all the other guys. But in a rolling course where you need a lot of different talents all mixed up into one body, it’s the GC guys, the general guys that beat.
So the sprinters are no longer any good at winning that stage, and this is what I’m looking at with the market right now. You have a one trick pony. You have one sector that’s doing all the lifting and in their element they’re the best. But I’ll tell you, it’s pretty fragile. I wouldn’t personally bet on the sprinter to win the Tour de France, for example. I wouldn’t put money on it, although I might enjoy that he might win on this flat stage. I think that’s the situation with this, that the market is really poised. And you said it yourself, it could be a bull market in technology, but not necessarily the other stuff. So you can bet on technology, but you don’t want to bet on the market. Anyways, carry on Greg.
Greg Schnell :
I tried to create some, what I call, strength indexes to try and figure out when the market is going to pull back, I want to be ready and then when the market is ready to advance, I want to get back on board. So what I did was I created these strength indexes that keep track of momentum. You start at the bottom, this is a nice buy point, and then it takes off to the top and you want to stay long. Then as it starts to correct you drop. So this is June of last year, August, December, January. Remember in January I mentioned that the market went straight up towards February 1st and then stopped. Well, my strength indexes had already rolled over mid-January saying, whoa, there’s no horsepower here. So you compare that with this move up and then all of a sudden we literally pulled back through February into March and then we turned higher again.
And right away at the beginning of April, my strength indexes started to fail. Now what’s really odd this time, compared to like literally four or five years of history, is technology has taken off to the races, taken the indexes up with them, and my strength indexes are down here around 25%. So it is that strange to me and I use these things religiously. Now I will say there’s one good note here and that is the PPO of my strength index or the momentum curve for my strength indexes is actually making a higher potential low here and perhaps this technology does widen out and pull us into a big bull market. So I get a little bit excited about that. I have three different calculations with three different timelines for history. This one’s actually turned onto a bull market as a Friday afternoon.
Interesting. I’m very puzzled by it, but these strength indexes have really helped me stay out of trouble. Here I’ve been trying to stay out of trouble for six weeks and it’s been a very painful staying out of trouble because I’m watching the indexes expand in front of me. Really the NASDAQ, not so much the S&P but the indexes take off without me. The main reason is because my strength indexes are saying we’re getting down to the last few stocks before it breaks down. I have one other chart that I think is really helpful for breadth then let me just find it. Sorry about the scrolling here. Well that one’s a good one, but this one’s pretty important to me. I have 167 charts that keep track of indexes and industry groups and then I weight them.
In this case, what I’m trying to keep track of the number of stocks that have a weekly PPO above zero. You can see back here in 2019, we started off and we had a big run here were lots of stocks or indexes and industries were above zero and very few were below zero. So that’s cool. When they crossed, that’s a pretty important signal. Then we had COVID hit and this thing was plummeting. So all of a sudden none of the industry groups had stocks had PPOs above the zero line, then we got the bull market and this thing was firing off. Now, even if you just got the curve right, that was cool. So then we had the September-October period and we raced up and we got into January and we took off on our new bull market.
We actually fell below in early March and then we’ve fallen below again this week at the end of May here where we have more stocks or more industry groups with their PPO below zero than above zero. If you go take a big picture view of any chart, and I’ll say Apple, Amazon, Tesla, all the way down to an oil company stock, whatever, just put on a weekly chart, put on a MACD or a PPO. I prefer the PPO because it helps compare history better. But when you do that, you’ll just notice when the charts are below zero, it’s a great place to be out of the stock. Unless they’re turning up below zero, you’re probably not interested and quite frankly, once they go below zero, it’s typically where they speed up to the downside.
That’s a really critical place. So here I have more industry groups and indexes and sub-in indexes going negative this week than at any time. Really since the top after 2021 coming into 2022. We’ve tried and we’ve tried the second time and failed. That makes me feel like this rally is so risky and maybe it’s the point where my SSI’s, the ones I showed you above, are right and we’re going to turn up from here. Cool. But we’re at a very fragile moment. We’re at about a 50/50 split. And again, I’ve got different ways to show this. The chart here, I call it my heat map. But what it does is it keeps track of if you just take the full stochastics and are you above 80?
Are you between 50 and 80? Are you between 20 and 50? Are you below 20? So the green is above 80. Well, we hit a level this week where the yellow is now more than 50%. It’s worse than any part of the bull market from 2020 all the way through to the end of 2021. This spike was February 4th of 2022. So we’re literally riding up where over so many of these industries are breaking down compared to their last three months. So again, I’m trying to look at it through all different angles to figure out what’s going on, but this market is extremely weak. And again, we have this very small pocket up here of industry groups and stuff above 80 on the full stochastic. When you look at that and just say, okay, we’re at the narrow end of the range here.
How long does this bull market roar? Well, to me, this really has to start widening out and if it doesn’t widen out, I just think we’re going to accelerate lower and literally midweek this thing was painting a big red picture and yellow was taking off and then all of a sudden we got the turn and Thursday-Friday we had some 2% rallies and 1% rallies on the indexes. It just brought it back to flat for the S&P but boy, that’s how fragile the market is here. I hope people can use that breadth analogy to just understand that we’re not stupid for thinking it’s caution time, it’s just the data is all sitting there and the fact that the market hasn’t broke is maybe, I want to say frustrating because the data all says it should break and it hasn’t.
But the reality is, obviously, we’d all like the market to widen out and become a big bull market. That would make it much easier to invest and that’s what I’m looking for, but I have yet to find it. So I really struggle with these types of things. So I’ve tried to display it in different ways and hopefully that helps your viewing audience just understand why we need to be more careful here, especially based on that trend line on the big indexes of why this is such a risky spot.
Keith Richards :
Yeah. Well thanks. It adds a lot of color to a very similar message I’ve been screaming and very much appreciated because I think you displayed it in a better way than I do. I’m going to bring you to a final topic, but I think it’s one of my favorites and we were talking briefly about this is the larger commodity picture. So maybe Greg, you could bring us through both the current look of what you see on the commodity picture and what you might see on the bigger longer term pictures. Don’t be afraid. My audience, they are not in love generally speaking with any particular government strategy that might be going on right now. So hammer away.
Greg Schnell :
I think the context I need to try and present is, a large part of the world does not have energy so they’re trying to move to energy and really, the most successful economies in the world had an abundance of energy. That has been the background for the last 200-300 years. It’s what made England so great when they had the industrial revolution and they put ships at sea and they had methods to power these ships. When they switched from steam to coal that mattered, and when they switched from coal to diesel that mattered and all of these things were a level of efficiency better. We’re worried about carbon and that is a very valid method. So what we need to try and do is figure out how to control that and we’re trying hard, but one of the major things that people that don’t play the commodities a lot don’t understand is that we have a reservoir.
I studied geophysics in school just to help people think I’m a geek. So that squiggly line is trying to find oil in the ground. I worked in Shell Canada in their Frontier Exploration group for a while. What you’re trying to find is in these squiggly lines a zone of oil or a zone of pay. You get a reservoir and then you calculate how big the holes are in the reservoir and how connected the holes are and your ability to get that oil out. So let’s just say that in a given reservoir you find a thousand barrels or a million barrels, we’ll pick a million barrels just to say it’s got some shelf life. Well then you’ll take a big basin like the Permian or the Montney or the Clearwater is one being discussed now in Canada.
These basins have a level of potential and then you’ll have type A wells, type B wells and type C. So you always want to drill the A first because they’re the more lucrative wells and then level B and level C. Well, for a lot of the shale gas in the US, they’re on level C wells out of a big reservoir, and they’ve drained these reservoirs significantly. So in the old days, we used to drill a straight well, and then we’d kind of crack the ground around it called fracking and allow that oil to fall back to the hole. The weight of the rock would push the oil into the hole and then after a while we would put a pump jack on it to lift it up when the pressure wasn’t there. Where we’re at now is we drill down and then we go horizontal through the same reservoir, but we can reach way out into that reservoir.
But what that also means is we drain that reservoir a lot quicker than we ever have in the past. Rather than drilling a thousand holes down, we drill six holes from one pad and we go out into the reservoir all different ways and we bring all that oil back to the middle. We’ve lowered our carbon footprint by making this much easier to do and cleaner to do and when we do that, we take the natural gas and we actually use the natural gas. If you go to some of the other countries, they’ll just flare that. We capture it all. But the big problem we have is, if you look at a Shell or an Exxon or a lot of the big companies, nobody’s interested in looking for big reservoirs anymore. Because the political situation is so uncertain, they are having trouble getting any project approved.
I mentioned to Keith in our talking points before, tech resources applied for a new mine in Canada to mine coal. It was a 90,000 page report and it got like rejected within days. So nobody wants coal and nobody wants oil. But the reality is 75% of oil’s use is not transportation based. We have this huge issue where nobody’s investing, but we’re still using, and we keep thinking that we’re going to move to this transition of energy, electrical energy typically, but we’re going to use wind and solar. The concern there is when the wind didn’t blow in Germany, the electrical rates went so high they had to shut their industrial factories. Now when the sun doesn’t shine for so many days, and in Holland it doesn’t shine a lot, I lived there for a while, you could have the same problem where you could go weeks without getting enough sunshine to actually power up your solar.
So what you’ve created is two very unstable sources of power. And now you need big batteries to store that. Well, we have the same problem getting mines approved for batteries as we do for coal and oil. So nobody wants it in their backyard. Nobody wants a mining shovel. Nobody wants any of this. But the problem is we all want the energy in whatever formation it is in so we’re going to need an abundance of copper, lithium oil, natural gas. Again, oil gets broken down into plastics. Just look in your office, how many things are plastic or in your kitchen. All of that stuff still comes from oil so somehow we’re going to get that going. Here’s the problem.
We’ve stopped funding oil and so we’ve told the oil companies to raise their own capital from their own cash flow to finance the next development of wells. The big companies like Shell are sitting over here trying to get renewable energy going and BP is trying to get renewable energy going and nobody is doing the exploration in the arctic frontier to get oil out of these vast reserves anymore. There’s just no chance of getting a pipeline built, no way to get it permitted so you just stop. We’re reaching this point where our existing reservoirs are very, very low. And then the oil that we’ve actually taken out of those reservoirs and put in storage tanks above ground for pipelines to connect to and move that oil around, those reservoirs are low.
Then we built a strategic petroleum reserve, which was to try and deal with the price spikes that we’re going to see in solar and wind, to deal with the oil price shocks we were having before. What we did was we had the strategic petroleum reserve where we’d have a big underground cavern and we would fill it with oil, and then when price ran up, they would take oil out of that. That’s what happened during the Russian war, the strategic petroleum reserve started to get oil taken out of it. Now they haven’t backfilled that, so it’s at the lowest level it has been in a long time. So we don’t have a strategic petroleum reserve, we don’t have a lot of oil above surface and we’re not replacing the oil in the ground or the reservoirs in the ground that we used to have.
And really since 2018, this has been going on where it’s been getting tighter and tighter and in Canada, we’re probably talking 2015, literally eight years of trying not to get any oil development done. So you look at all of that and yet demand is going up every day. China’s demand changed last month. Their imports changed by 1 million barrels in a month. When 1.3 billion people start to want energy, it changes dramatically. So we have India and China both ramping how much oil they’re importing. They’re trying to get it from Iran or from Russia or from Canada or from Saudi Arabia or from whoever will sell them oil. But we’re all trying to get there and yet the problem we have is domestically we have no new supply coming on. So it’s critical to understand that we’re about to go through this real squeeze.
Just last year when all of a sudden northeast US ran out of gasoline, that was a problem that was quickly fixed within two or three days by trucks and ships moving it around. The problem is if there’s nothing to move around, then we’re trying to buy it elsewhere. And we’re at that crunch point and I’m a huge fan of not trying to buy oil stocks when oil is at the top of the range. I want to buy it when it’s at the bottom of the range. So I’m not trying to buy a tech stock breaking out to new 52 week highs. I want to buy XOP down here in the bottom when it starts to break out. You can see this scooter ranking, which tells you, and this is an ETF, how strong the price action is compared to all of its peers.
And so compared to all the other ETFs, this spent almost two years at the top of the range and now we’ve dropped down to the bottom. But the real point here is we’re just starting construction season and driving season and airfare season where people go on holidays and we’re increasing the volume of air conditioning we’re doing around the world. So all of these factors are coming together to what I think should be a juggernaut of a second half of the year. And we’re basing in here oil has been going sideways for four weeks. I’m really excited about the opportunity to own this space coming into the fall unless we have a dramatic recession and if we have a dramatic recession and people are out of work, that would change how much oil we’re going to use. But other than that, I really expect demand to pick up. I would encourage you to look at oil stocks when they’re out of favor, not when they’re in favor. Like don’t wait until they’re up here and it looks all guns and roses and then you have a six-month flat spot. That’s not the place. You want to be down here at the bottom when nobody loves it, starting to look and when these charts start to turn, we want to get involved and I think we’re there.
Keith Richards :
Excellent. Well, yeah, you took the words right out of my mouth and you did it again more eloquently than I often do. Another point you made is all of the materials that are used to produce this so-called green energy, well, that’s has to be mined. I did a blog recently or maybe it was a video actually, where I talked about some of these rare earth elements. A lot of people aren’t aware that the magnets, and you mentioned this Greg, the magnets that are used in wind energy production units, large magnets are used to create that energy. China has literally cornered the market there in production of the materials to make the magnets. There’s been some banter back and forth between Biden and China that they’re kind of using it as a bargaining chip because of course they know that the US is on this big green movement, most North America is.
China holds the carts because really we haven’t put the money and resources into the mining of those elements and I don’t know the name of the elements. Whatever the case, these are things that people I think are not considering is that all of these things have to come out of the ground somehow and whether it’s demand for green or just to heat our homes, which we’re not ready. Greg, I mentioned it just before the show that I was watching a particular environmental scientist and he was saying that if you combined all of the solar and windmills in the world, you couldn’t even heat Canada over the winter. So we’re not in any way, shape or form even close to giving up on fossil fuels and yet to cut back on this stuff, like you say, it’s obviously more political posturing than it is reality and that’s why the prices are probably going to go up.
Greg Schnell :
I need to put in one word here because it’s really important. We started to build the Transmountain pipeline and it was a 6 billion project. It recently was announced that over 30 billion. Well, it’s not because people out here got stupid. It’s not because people out here couldn’t control cost. Literally, if a sparrow starts to nest anywhere near the pipeline, we have to wait six weeks until they’re done. We had 50 snails on the path in the winter. We had to wait until spring for them to migrate off the path. We couldn’t take a shovel and lift these snails out of the way. And so you’ve got crews sitting there for six and eight weeks waiting for a bird to move. I’m trying to be very polite when I say this, but you know, Deerfoot Trail drives through the middle of Calgary, the Osprey nests right on a lamp pole under a road with 130,000 cars a day and nobody cares.
That’s fine. He’s right beside the river. That’s okay. But literally trying to build the pipeline has been this big, oh you guys are damaging the world and we have to wait for the birds and all this kind of stuff. So if the lithium mines and the gold mines and everything we do in Canada starts to get the point that we have to wait for birds to fly, we’re just not economic and so the expecting low cost energy to be here in any form or fashion is a really difficult investment decision for people to make. I would just say that if we are going to continue on this path of trying to stop the world so that nothing happens and we don’t use any energy, I think we’re going down a really tough road. I really hope that we start to figure this out and get to a more viable solution because if we’re going to build lithium plants in Quebec with the same boundaries that we built the pipelines in Alberta, it will be unbelievably difficult to get those done with any level of financial viability.
Keith Richards :
Not to mention that the green technology isn’t going to replace fossil fuels because we’re simply not able to but whatever the case, there’s always opportunity. We can look at these things and they drive us crazy as citizens of the country or whatever. But you’re talking about, there’s opportunities abound for those of us who take advantage of. I actually wrote a blog on taking advantage of government stupidity. I think this is one of those opportunities that you can probably make some money on idealisms that just aren’t real.
Greg Schnell :
Why do I think that we’re ready to get involved in energy here? What I like is this natural gas after going from $10 to $2, or just under $2, is starting to get the PPO to turn up and you could draw a trend line down here and I like trendlines on my momentum indicators when they break. I’m much more interested. So I’m looking at natural gas right here and I want to start to think about having a position in here and this might wobble around in the $2 to $2.50 range. Try not to get washed out. When this turns it should be another beautiful run. So that one makes me prepared. Look at the full stochastics on the price of oil here. Every time it’s making a higher low, and it looks to me like we’re about to turn up for the next cycle for oil, again, we’re sitting down here closer to the lows than the highs and that’s where I want to buy oil. I don’t want to wait until it gets all the way back above six month highs. I want to buy it as it’s turning and then once it gets up to the frothy levels then everybody goes, well look at what’s going on in oil. That’s probably the day you need to be trying to figure out how to sell it instead of buying.
Keith Richards :
Contrarian investing. I love it. I really, really liked your comments on the ups and downs of, and how you use the relative strength studies. I learned a lot there and I guess we’re quite on the same page when it comes to the commodity argument. I’ve been a commodity bull. We were in the commodities in 2021 and then we moved out in early 202 more for technical reasons, but we’re just tiptoeing back in again for the same exact reasons that you’re talking about. Awesome comments. You always like people that agree with you, right?
Greg Schnell :
It makes it much easier. I don’t have to argue.
Keith Richard :
Thank you very much and I’m just going to mention your website. Once again, it’s OspreyStrategic.org. You can go find out more about Greg and more about his research, which is, I must say, excellent and I am subscribing to it, so money where my mouth is and you can learn more about Greg there. So thanks very much for coming to the show.
Greg Schnell :
Thanks a lot. Thanks for the invite, Keith, and good luck.
Keith Richards :
All right, thank you. Have a good one.