"Oil is a Speculative Bubble"

So says Larry Kudlow.

I think most would agree that the issue of oil being a bubble is a hot topic. It makes sense to explore the state of the oil market along with other relevant commodities.

I have written several articles that have tried to gage the current state of the oil market and the stocks that go with it. Bubbles are manic emotional rides, we learned that five years ago. It is tough for me to see where oil is currently a bubble. The media has been on quest to find the next bubble. Real estate? Oil? Any bubble will do.

Excesses in price are not the same thing as bubbles. The Japanese stock market is still down 2/3's from its highs 15 years ago. The Nasdaq is down about 60% from highs made five years ago. When the Japanese bubble was inflating there was real concern that Japan would supplant the US as the world's economic super power. When the internet bubble was inflating, street analysts were finding new and incorrect ways to value the new economy companies. The energy bubble from the early 1980's saw the sector from from 30% of the S+P 500 down to still only 8.5% today.

The energy component of the S+P 500 began to outperform the broader index in June 2004. Since then the SPX is up about 9% while the energy sector, as measured by Energy Sector SPDR (XLE) is up a little over 40%. Before last June there was no sustained outperformance.

All the other bubbles cited, built up for years and were not accompanied by constant is this a bubble chatter. Energy stocks could correct in a painful manner. Wednesday's mini meltdown in the group should be evidence that traders are willing to bail out very quickly. I think this means that the group could easily shed 20% or so very quickly. I actually do not think that big of a correction is coming but I would not be surprised if it did.

Some sideways or downside trading could be a healthy development for the group. The backdrop, in my opinion, is that increases in global demand will dictate long term trends but as is always the case emotion will drive the short term.