The D-O-PE Cycle

Decades ago I was introduced to the work of one of the Godfathers of Technical Analysis, Alan Shaw formerly of Smith Barney.

He published a piece called “Market Timing and Technical Analysis” a copy of which can be found HERE.

Before you dismiss Technical Analysis as pure witchcraft I implore you to spend some time on the Google Machine searching Alan R. Shaw as well as his protégé, Louise Yamada, and their work.

You may find the way in which they apply technical analysis at a macro level mixed in with investor psychology to be fascinating. I use their teaching in my charts all the time.

(FYI, Louise Yamada was the first person that I can recall to call the bull market in commodities & energy back in 2000 in her book Market Magic (HERE) which probably means she started work on it a couple of years prior when the tech wreck was getting started.)

In the Shaw piece referenced above he explains investor psychology and secular bear and bull markets in this lovely graphic.

Source: Alan R. Shaw, Market Timing & Technical Analysis.

There is no shame in my game and I completely “borrow” and repackage Shaw’s theories but rename it to what I call the 3-stage energy D.O.PE cycle.

1. Doubt - Despite the rally in energy, doubt still exists that we are at the doorstep of another cycle given recent history. The “easy money” is made off the bottom and doubt remains abundant that the cycle has legs.

2. Optimism - A growing consensus that supply/demand imbalances will last. Capex budgets begin to rise. Returns remain strong but incremental returns aren’t as strong as the Doubt phase.

3. Parabolic Euphoria - The “this time is different” phase where corporate capex accelerates, investors flock back in droves and capital is allocated to outrageous projects (ie GTL, oil shales in the 1970s, etc) on the fear of peak supply.

It seems to me we are closing the door on the first phase - Doubt. And if I am correct that would lead to the Optimism phase after a brief pause. Whether or not we are in that “pause” now or say early 2024 remains to be seen.

Below is a chart of the prior cycles that depicts this D.O.PE theory.