I've been studying late at night for my CMT test this Friday, and I was reminded by the FSLR chart how bullish the ascending triangle pattern can be. And, with that, I decided to sell my FSLR put (singular, just one) this morning at a loss. Congrats, Beanie! This is your day in the sun (literally).
The GDP came in at (gasp.......) a positive number, which I guess means, based on the current data, that we're not (and maybe won't be.........who knows........) in a recession. The market's reaction was positive, but hardly a blow-out. I guess everyone is on pins and needles for 2:15 EST when the Fed announces.
Now, here, from Slope HQ, is a brief update from our intrepid energy analyst......
Today could be a pivotal day for energy stocks and the whole energy/ materials
trade that has dominated the markets YTD. No, it’s not because of the DOE weekly
inventory report due out at 10:30 EDT. It’s not because of earnings reports by
major oil companies (most of which have “beat” by a wide margin), nor gas and
heating oil futures expiration at session end. Rather, today could be a day
where industry specific fundamentals don’t matter. The reason is that equity
markets may decide that a floor for the US dollar has been set if the Fed truly
makes one final nominal cut in rates and is then done. This view has already
been firmly reflected in the price action of gold, and even more so in the price
of gold equities, which have been hammered over the last 30 days. Oil stocks,
however, have not corrected and are sitting just below mostly all-time highs.
The charts look extended. Even the commodity looks like it should pull-back to
the $105 - $110 per barrel range. If this happens, the sector could correct 10%.
Recall that OIH was below $165 just 40 days ago. The point is that the threat of
sector rotation over the next several days is real and bold bets on the long
side may not be warranted. The threat is magnified by the fact that today is the
end of hedge fund performance reporting for April when the long energy/materials
trade was a huge contributor to monthly performance. If SPY and IWM break-out
today after the Fed decision at 2:15, it will likely be at the expense of OIH
and XLB. We shall see.
Well, as I've been saying, tomorrow (Wednesday) is going to be huge. An hour before the opening bell, we get the early GDP report (subject to revision - twice - in the near future). With so many people saying we're not in a recession, it'll be interesting to see what the data indicates. Then, at 2:15 EST, the Fed does their announcement. Every character, comma, and space is going to be interpreted to death.
From a charting perspective, it's impossible to say what will happen except that it'll be big. I have only one index position - - a fairly large-sized put - - but I'm definitely keeping a lot of cash on the sidelines just in case of some (God forbid) bullish blowout.
I got rid of my NDX puts today, because I really don't like the action here. I know that $MSH looks good, but $NDX is what I had puts on, and this chart worries me.
Added to which, the $COMPQ is exhibiting a pattern that has had very bad (for bears) results in the past few years.
On a brighter note - - and I actually had a pretty good day - - my dozens of shorts in oil are doing great. OIH has only lost about 6% of its value since its peak, but I really like how this is shaping up.
Likewise, my double-inverse ETF on oil, DUG, had a good day too. I bought these on the day where the low was made.
My puts on MDR also did well, with the stock falling nearly 9% today. This is another nice example of an attempt at a bullish breakout that failed, similar to ISRG.
And.........finally!.......my puts on BHI are shaping up. I like the way the price is moving away from that trendline.
0x
One other favorite of mine is GENZ, which ever-so-slowly is building what could be a terrific head and shoulders pattern. If complete, this could take GENZ down to the low 50s.
That's it from me. I'll be watching IWM like a hawk at 5:30 a.m. my time. I offer something that I usually cannot - - and guarantee - - and it is this: April 30th is going to be really, really interesting.
This week's Barron's had an interesting article about stocks that would probably suffer if the dollar regains its strength. My view is that the poor ol' greenback is probably in for some recovery, so I found this article of particular interest (particular since, of the sixteen issues they mentioned, I already had puts on half of them). Anyway, here are the charts of the stocks they pointed out:
If there was one chart that terrifies me, it is shown below. It shows what could be a very formidable inverted H&S pattern on the IWM which, if fulfilled, would be explosively powerful for the bulls.
Conversely, if there was one chart right now that gave me comfort that the bullish nonsense of the past six weeks had, thank God, finally petered out, it would be the chart below.
One thing I will note is that volume continues to whither away. Today's volume on the IWM was 90% less than it was last August 16th. The volume today is akin to what was seen on Christmas Eve.
Now, I know only enough about Elliott Wave to hurt myself, but I've made a stab at labeling the AMEX China Index, which looks ready to resume its sweep downward. Any of you EWT folks, let me know how I did.
As for the $INDU, it was wiggling up and down all day long and wound up slightly down. I think most traders were falling asleep out of boredom.
The Russell was relatively strong, and I have to admit, I am so concerned about the aforementioned pattern that I closed out my Russell puts at a loss. I simply don't want to tolerate that kind of risk of something happening like Wednesday rolling around and being up 400 points. What if a recession hasn't started? What if the Fed produces whatever love juice the bulls are craving? Wednesday is going to be gigantic.
The S&P is a deliriously interesting pattern right now. Three different patterns at play here - - a descending trendline, a horizontal line, and a channel, all of which spell "short!" unless they are violated.
The Transports were particularly strong, pushing up to its next Fib level.
And gold, in which I have no position, looks like it could be headed for a much steeper fall soon.
Now a handful of stocks. There are a ton of stocks which have enjoyed multi-hundred (or thousand) percent gains. Anything to do with fertilizer or agriculture, it seems, has been blessed. Some of these are finally showing a bit of weakness, such as AGU.
I don't know if I've had a trade on KLAC in the past decade, but I'm intrigued by this one. It has a nice, clean stop too.
I've got a few put positions on investment banks, and this is probably my favorite of them.
I confess to feeling pretty down lately. I've pulled some chips off the table out of fear. I will be more comfortable trading these markets once the one-two punch of Wednesday is past us.
The past six weeks have been pretty much a bull-fest. Now that we're mushing up against the upper boundaries of what (God willing) will be the end of this rally, activity has shriveled up, and people are alternating between watching (i) grass grow; and (ii) paint dry.
The VIX has whithered away back down to the teens. Complacency is king again. Just look at the smirking bull on the cover of Barron's this week. I, for one, welcome our new bull overlords.
Although today alone is going to be pretty quiet on the economic front, this is a blockbuster week for news, particularly the Big Kahuna - Wednesday - where the GDP comes out (answering- - not speculating - - as to whether we're in a recession or not) and the Fed announces (rate cut? steady?). Expect mid-week to be insane with volatility.
Getting to be a rough neighborhood again, isn't it?
Whenever the market's been up for a while, the bully-boys come out. Some comments are serious, some are sarcastic, but a few merit a reply. I thought I'd tackle a quartet of these on this fine Sunday morning.
You seem to try & tackle uptrending stocks at their highs, even though they keep making new highs. Do you ever buy puts on downtrending stocks? I gather you are a counter trend trader at the core. A true contrarian at heart.
REPLY: A bunch of my positions are uptrending, yes, and some are very near their highs. I guess you could say I'm aggressive right now. Some of my puts are on stocks that have already lost plenty of their value, though. AKAM springs to mind. In any case, yes, what I'm doing is somewhat hazardous, but my positions are spread thin enough and my stops are tight enough to protect me.
Blame it on Bush!...Beautiful Tim.....anything else?....global warming?
REPLY: I suppose this was prompted by my jab at the rebate checks going out. First of all, there was no "blame" anywhere in the post. I frankly think Presidents get way too much credit (Clinton) and way too much blame (the first George Bush, back in 1991) for when the economy is doing well or poorly. Economic trends are much larger than the man that happens to be living in the oval office at the time. But the public isn't that sharp, so they tend to create a false causation between the executive branch and the stock market.
On what basis are you making the bearish argument for FSLR? There is nothing technically to indicate that the trend is going to reverse. Are you just speculating that FSLR will have earnings that do not meet expectations and the stock will tumble? Show me the Technicals on this. Many of your trades are based on "anticipation" of trend reversals. This is speculative rather than being based on Technical Analysis. One of the golden rules is - Dont short sell a stock just because it is too high :) Same Story with Crude, no reason to believe the trend is going to reverse. With GOLD, there is a real trend reversal and it has indeed turned bearish for the short to medium term.
REPLY: Of my two solar plays, FSLR and SPWR, it is true that SPWR has a far, far better technical argument. As for FSLR, I'm in it for a couple of reasons. First, the volume has been completely divergent from the strength in price. Second, and much more important, what should have been a terrific bullish breakout is completely limp and malformed (see yellow tinting). If this thing has great earnings, goes to $350, and my options are blown to bits, I won't be shocked. But I'm willing to take the chance given the prospect of the stock just as easily going to $250.
Bears reason too much. But it's wrong to trade on reason. A good example is DECK. You'd think that people would stop buying ugly and expensive boots in a recession. Yet the sucker came out swinging, knocking 21% off bears' position. Another example is GOOG. You'd think that people would search less when they have a lot less money to spend? Yet the pig came out flying, taking $100 out of bears' pocket in one day. I always maintain that it's impossible for anyone to have an accurate grasp of the fundamentals. Most economists are wrong even though they put their lives in the matter. Most ANALysts are wrong even though each of them only research a few companies with all their stupid time. My point: don't ever make a trade based on reason. While I'm at this, I hope everyone here would stop making idle predictions on the market or stocks. It's a total waste of everyone's time. And it might lead a few innocent souls into wrong trades.
REPLY: There is so much wrong with this post, it's almost impossible to know where to begin. So I'll use bullet points and go in order........
Yes, bears reason too much. I will actually give you that point. And I actually consider it a weakness, since the market (and the bulls) are pretty much airheads. But they are what drive the market most of the time.
DECK is a stock I follow, but I don't think I've ever placed a trade on it. And even if I were to discuss it, I doubt I'd use the style of the boots as a reason for an interest in the trade.
As for GOOG, I think it's pretty widely accepted the entire world was wrong with this one. If you were one who bought calls beforehand, my hat is off to you, but I strongly suspect you are simply making judgments based on hindsight, which anyone can do.
"...it's impossible for anyone to have an accurate grasp of the fundamentals" - I agree. Which is why I'm a chartist.
You go on to state that no one should trade based on reason, and that people should stop making predictions on markets or stocks. Well, I trust you won't be wasting your time here anymore. Because the board is based on reason (more or less), and it certain endeavors to entertain where markets and stocks might be going.
Well, that's enough. The Sunday Times awaits. Adieu.
Let me start by saying that this tax rebate that Bush was yakking about all day is going to stimulate only one thing: the deficit. The notion that this political gimmick is going to magically turn the sinking economy around is absurd. Those checks are going to be as potent as the Gerald Ford W.I.N. buttons from three decades ago.
Now, there has been something very weird going on with IWM volume. I was going to mention it a couple of days ago, but I shrugged it off. But it's going on long enough that I have to point it out. That way - - the volume is alternating! High one day. Low the next. High one day. Low the next. It's almost a perfect oscillating pattern. I have no conclusions about this. It's just...........weird. The volume graph is starting to resemble a comb!
One area where steady volume is not a problem is crude oil. This market pushed toward the $120 zone today. It's always something. This time is was a U.S. ship shooting a missile or something. God knows. It seems almost any news pushes crude oil higher these days.
Although OIH was, in turn, higher, it isn't making new highs like crude itself. I am very bearishly positioned with respect to oil. It's either going to break very soon, or else I'm going to have a lot of stop-loss orders on my hands.
.....and heavyweight First Solar.........So I can already tell you next week, if FSLR has blowout earnings and I get stopped out, beanie will have 57 posts about how right he was. If the stock plunges, he'll be nowhere to be found. Count on it.
The S&P 500, on which I own puts, is mushed right up against the underbelly of its broken channel as well as its descending trendline. That's on top of the psychologically important 1400 level.
And the NASDAQ is banging against its 25% line on its channel. Now this one I'm more nervous about, since it is sporting a not-too-terrible inverted head and shoulders pattern.
But, as I mentioned yesterday, I draw some comfort from the formidable bearish pattern on the $MSH (whose options, regrettably, are so thinly traded as to not be worth pursuing).
Lastly, the $XBD index has encouraged me to buy puts on investment banks, which have recovered sharply since the BSC debacle five weeks ago. I've got positions in Lehman......
It's been weeks and weeks since we've had a juicy, consistent bearish hammering of equities. Oh, I miss those days. But I remain confident that one day soon the bear will be back. He'd better. Otherwise this blog is going to get pretty dour!
I'm bearish. Really bearish. Big surprise, eh? But, honestly, the charts are looking sensational.
The one bullish chart, $SOX, seems to have had its run. And the one risky chart, $TRAN, looks kind of Fib-bound to me, and is approaching (at best) its next resistance level.
I'm pretty excited about where things stand now for the bears. Take that as a contrary signal if you must, but that's what I'm thinking.
There's been chatter in the comments section lamenting the relatively infrequency of my IWM musings, now that OIH and company have pushed it aside. Well, let me throw you guys a bone:
As you can see, the Fibonacci is doing a yeoman's job of keeping the bulls at bay. There was a bit of a violation of this line a number of days ago, but it was swiftly tamped down.
This morning's lame-o consumer sentiment numbers snuffed out an early rally (I'm only typing this 40 minutes into the trading day, so keep that in mind). I suspect the bulls - like Bill Clinton, shown below - may soon be asking themselves, "what am I getting myself into???"
As I've mentioned before, observers of financial markets speak of "critical junctures" on, it seems, a daily basis. I try hard to refrain from using this phrase often, but I sincerely think we're at a key juncture at this point, based on the charts.
As a preface, I will note that complacency is as low as it has been all year. The $VIX dipped down into "the teens" again for only the second time in 2008.
Let's look at the bullish case first. Some people have pointed out inverted head & shoulders patterns. The cleanest one I see is on the NASDAQ Composite, shown on an intraday basis below. A clear break above 2,450 or so would be disastrous for the bears. A fully-realized breakout would send this index hundreds of points higher.
A somewhat shoddier inverted H&S is presented by the Russell 2000. But note both the chart below and above have prices getting very near major resistance lines as well. So there is certainly a yin-yang tension at this point.
Lest I get the bears too scared, allow me to show the next graph, which for me is jumping-up-and-down bearish. Plus, it's a daily graph, not an intraday one, which obviously has far more import. This is the High-Tech index, and this is about as clean a head and shoulders pattern as I've seen in a while. Now, this pattern may have already been fulfilled by the nearly 100 point drop in January. However, the retracement - which has been hammered out over virtually the rest of 2008 - is all the way back to the neckline. This strikes me as a delicious shorting opportunity with relatively low risk.
A somewhat similar retracement is exhibited by the Dow 30, although the pattern is not nearly as clean. Dow 13,000 has been a very important line in the sand, and in spite of the Dow's strength today, that line was still not crossed.
My bearish disposition toward the gold market paid off again. My puts on ABX and $XAU had good profits (about 50% and 100%), and although it's entirely possible I got out too early, I'd rather be safe than sorry. A break beneath $170 on the $XAU may suggest a farther drop to $150 or so. This is a decent H&S pattern, but before you get excited, look immediately before it, and you'll see a somewhat similar pattern that didn't lead to jack squat.
Poor Jana - - battered by China. Your redemption may be at hand! Looking at either side of this line, it's almost like a error image. The reduction of a stamp tax (what is, this, 1775?) is a silly reason for a market to go up. Come on. Get real.
That's all from the Timster. I haven't done a video in ages. Just haven't had the time. If we ever get a real blowout day, I'll probably be giddy enough to do one. Until then, text will have to suffice.
OXY reported strong 1q08 operating earnings of $2.20 per share, fully
diluted. These results were up an impressive 137% y/y, and beat consensus of
$1.95 per share. Oil and gas income was up 112% pretax and volumes increased 8%
y/y. Significantly, these profits were generated on an average NYMEX oil price
of $97 per barrel in 1q08. Even with today's decline, oil prices are up another
$15 per barrel versus the 1q08 average level. If the increase holds, OXY could
earn another $0.35 per share in 2q08. Interestingly, consensus for 2q08 is
currently at $1.86, which looks a tad low given that the company just earned
$2.20. OXY appears well on-track to now earn between $8.50 - $9.00 per share in
2008, which is above my prior single point estimate of $8.50. Clean EPS for 2007
were $5.25 per share.
Cash Flow in 1q08 was $2.5 billion, or $3.00 per share. Free Cash Flow
(FCF) was $1.6 billion, or almost $2.00 per share. OXY stock is now trading at
just over 10x FCF, which appears cheap. OXY management emphasized that they
would not let cash build on the balance sheet and indicated that the board would
consider a dividend increase. OXY did buyback 6.3 million shares in 1q08 at a
cost of just over $400 million. Management stated that oil and gas volumes would
likely be higher in 2q08 versus the prior quarter and would be higher in 2009
versus this year's projected levels.
OXY shares are down along with the commodity today but the stock remains
one of the cleanest ways to participate in a strong oil price environment.
Traders could consider going long OXY on this pull-back and go long 1.0 - 1.5
shares of DUG for every share of OXY as a hedge. The exact ratio of OXY to DUG
is driven by how tight one wants to construct the hedge.
In the meantime, I'll confess that, in my IRA, I've loaded up with ten "battered" issues and have trimmed my DUG (double-inverse on oil and gas) from 2800 shares to 1800 shares.
The other ten long positions are small (about 5k each), but even shortly after the entry the screen is all green. I've got relatively tight stops on all of them, set just beneath the lows of this week.
OOF, seems Disqus is down (again). ARGH! It's a nice system (when it works). Frustrating.
It wasn't that long ago that I'd do one blog entry a day and feel like a champ. This is my 5th posting today, and I'd feel guilty if I didn't get it done. Anyhoo.........
I see that the Chinese stock markets are exploding higher again. The excuse this time is that the government - which seems passionately devoted to propping up its local stock market - dropped its "trading tax" by two-thirds. That sounds like a lot, but this tax went from 3 tenths of a percent to 1 tenth of a percent. In spite of what sounds like rounding error to me, that was cause for celebration in China.
I've noticed something else as well - - "calling the bottom" has become a passionate hobby these days. It seems like everyone is convinced that the grueling (10%), extremely long (weeks and weeks) bear market is finally at an end. I offer ABK as a symbol of the danger of bottom calling. At every one of the tinted zones shown below, one could have plausibly said, "prices have stabilized and things are settling down; time to buy!" And you can see what happened each time.
A deeper example of how badly people can get it wrong sometimes is Starbucks. This company, which dropped another 10% after hours today, has been falling for months. But go to Amazon and do a search for Starbucks, and you'll see a mountain of books that tell business people how they can emulate the Starbucks way to forge their own prosperity.
I won't bother showing the OIH graph for a millionth time; it has displaced IWM as my obsession these days. I will tip my hat at the reader who turned me on to DUG, the double-inverse fund. I put my entire IRA into this item, and it's up nicely over a just a couple of days. I could see 20-25% more over the coming weeks, possibly. I've drawn a tiny red line indicating my entry point.
My puts in ABX and $XAU are doing nicely. Gold is really starting to take a beating. I'd consider getting out when it gets down to that purple zone. Until then, I'm holding.
I have a kitchen in serious need of cleaning, and as a Felix Unger type, duty calls. Good night, and I'll see you in the ante meridian.
I am about to get on a plane, so I only have a minute. In fact, I am writing this from a wheelchair at the end of a ridiculously long breezeway at Salt Lake City's airport. No, there's nothing physically wrong with me. It's just the only place to sit.
Anyway, AAPL reported after the close, and it was one big meh. It was down about $5 early, but looking at it a moment ago, it's only down a few pennies. At least it's not a blow-out. And Amazon is getting a few bucks knocked off it it, too. Good.
The ones that really got screwed are all those people that bought way out-of-the-money calls and puts thinking they would "pull a GOOG" on Apple (or AMZN, for that matter).. Surely you know by now that the God of Trading loves nothing more than to laugh his divine butt off at traders. So all those who missed GOOG and thought they'd make it back with AAPL were disappointed. Again.
I'll do my regular post (very) late tonight. Bon voyage.
The energy analyst returns! One of Slope's readers, a very experienced energy analyst, has been kind enough to once again pen a guest column. As before, if you'd like me to forward a note or simply your email to the Energy Analyst, just drop me a line. Enjoy!
The post on oil received several interesting follow-up questions, which I will briefly address. The first question was on the concept of peak oil. This is a fascinating topic and I have spent several years researching the topic with some of the key proponents. My own view is that the world is not at peak oil yet, but the roof is not that far away, perhaps only 5 – 10 million barrels per day (b/d) of additional output from an all-in base of approximately 85 million b/d. This is not a lot of up-side. Moreover, the cost of extracting these incremental barrels has sky-rocketed due to a host of constraints including land, skilled labor and materials, all the classic economic inputs, and it takes time to develop these massive projects. For example, the current cost for expansion of Canadian oil sands is projected to be over $125,000 per barrel of daily capacity and can take 5-7 years from start to finish. The only plentiful input is money, but money can’t change time or geology and it can easily be wasted on the wrong projects. It is safe to say that the era of “cheap” oil is over.
The central problem the world faces is that demand growth is out-stripping supply growth. For decades this was not a problem as there was significant spare capacity. It is clear that demand crossed the supply equilibrium several years ago. If new supply is not the answer, then the only solution to high oil prices is demand destruction. Unfortunately, the price required to kill global consumption may be even higher than $120. So far, only US demand has shown any weakness. The rest of the world continues to consume more oil y/y, and it’s not just China. Even at $100 plus oil, I project global demand will be up another 1 million b/d this year. Part of the problem is that as US consumption moderates, demand in the Middle East has soared. Makes sense given the financial flow. Moreover, almost all emerging economies (China, India, Mexico, Middle East, Russia, Asia) actually subsidize energy prices. Therefore, there is a greatly delayed global consumer response to higher prices – the market feed-back mechanism is broken.
If the rest of the world does not cut oil consumption because retail prices are artificially low, then it will be up to the US consumer to cutback because this is the only large market with real-time prices. Ironically, it could take a huge oil price for the US to cut enough demand to off-set growth in the rest of the world – we might have to experience a lot of pain. Think airlines and truckers. Note that we have provided China with $2 Trillion in US dollar reserves to subsidize low oil prices in that country. So it’s more complex than just a simple emerging market secular demand growth story, which is pretty powerful in itself. I can safely predict that world oil demand would go down if retail prices actually went up, but it is not happening right now. I can also safely predict that China will not raise the price of diesel fuel in that country before the Summer Olympics. Even then, increases will be halting as social harmony is more important in China than is the cost of fuel subsidies. Unfortunately, I think the US consumer will crack before the Chinese government.
One writer suggested that “something else was going on in the oil market” and, that perhaps a potential issue with Iran was the answer. All I can say, is that there are multiple aspects to the problem –it is not a “single”, convenient issue that can be addressed and it all goes away. The market has tried the single answer explanation (inventory levels, hurricanes, Iran, dollar etc) and none of them have worked. Interestingly, global oil inventories do not reflect evidence of hoarding, or preparing for a US issue with Iran. I do agree that it makes no sense for the US to continue to fill the strategic reserve, but I conclude that it is another example of one arm of the government not understanding the ramifications of its policy actions. Another example is the ethanol policy.
I haven't mentioned the Chinese market in a while. Late last year, when China was in a huge bubble, I could only shake my head. I read all the articles about the agonizingly naive investors in China that were piling in simply because things were going up.
Since last October, China lost nearly 50% of its value, and I'm sure some of the headier stocks had even more severe downdrafts. Just a few days ago, I was reading some interviews with investors in China, and it was like a synopsis of Investor Mistakes 101; one guy mentioned that he wasn't selling because it was only a "paper loss." AIEEEE!
In any case, I haven't touched FXI (which is the ETF) in quite a while, although I keep an eye on it out of interest. Long term, China has a pretty bright future (human rights and environmental issues aside, which are going to be relevant for decades to come). If I were long the FXI right now, I'd be pretty comfortable holding on. At least until it hit that next Fib level.
Good morning from the restaurant of the hotel I'm at in Salt Lake City. You are nestled between a bowl of steel-cut oats and applewood smoked sausage. It's a tight fit, but I hope you are comfortable.
This post serves no purpose other than to give the folks in the comments section a chance to do so without the 80 or so comments from last night crowding things. I'll talk to you later today.........
Today was a pretty good day. Ninety minutes before the close, it was a really good day. However, IWM and OIH recovered to some degree. In spite of that, we still whacked over 100 points off the Dow 30 and enjoyed a decent drop in oil-related items. So I'm not complaining.
I've removed the "intra-Fib" retracements on the IWM, since I'm frankly not sure where they belong. I'd rather not be basing decisions on levels I'm not positive are valid. So we remain between the very broad ~64 to ~72 range on the IWM, somewhat near the upper range. We had a drop today on the best volume we've seen in about a month. It goes without saying that we need to stay below last Friday's highs to have a prayer in this market.
The Dow dropped away from the psychologically important 13,000 level. I've drawn a red line at 12,900 which seems to be the neckline (as it were) for this pattern. There's a heck of a lot of support between 11,800 and 12,800 - - a thousand points is a lot to chop through.
I've expressed concern several times about the Transports. This pattern isn't exactly acting like a launching point. It's still intact, but a drop beneath about 4,800 would render it impotent.
The NASDAQ Composite (which is going to get affected strongly after tomorrow's AAPL earnings) is likewise beneath its ~2,420 horizontal line. We've also got the advantage of being at the upper end of that channel you see.
I confess to being obsessed with OIH these days. In spite of a record close (yet again) for crude oil, we actually fell more than a percentage point here. As you can see, OIH is a good 40 points above any really serious support. But, God almighty, this thing has a lot of bulls behind it.
There are plenty of stocks which are tempting to short simply because they are really "expensive." I put that in quotes, because shorting these momentum plays is dangerous. I have done it in a few cases, but usually I'm a little sensible and avoid stuff like CLF....
.......and PBR. All the same, I wouldn't be surprised (one day, one day) to see these get crushed. They could remain in a full bull pattern, but even a "easing back" to the trendline could blow 30% to 40% off of these.
With all the oil talk here, one might think the blog should be renamed The Slippery Slope of Hope.
One reader wrote me this morning about DUG, the double-inverse ETF based on the U.S. oil and gas index. What a gem this is! I bought some for my IRA account, since it seems a cool "straight equity" way to play any bearishness in oil (should it ever come........).
The energy analyst returns! One of Slope's readers, a very experienced energy analyst, has been kind enough to once again pen a guest column. As before, if you'd like me to forward a note or simply your email to the Energy Analyst, just drop me a line. Enjoy!
The next several days are critical for energy, and perhaps the overall market. As mentioned previously, Tuesday April 22 marks the expiration of the May oil futures contract. How the commodity closes could provide important insight whether the next stop is $110 per barrel or $125.
Regardless, oil and the equity markets are at a mutually exclusive break point, in my opinion. Hyperbole, you say. Panic, you say. Consider the following: The last $20 per barrel move in oil has added approximately $150 billion to the nation’s annual energy tab, an amount equal to the highly publicized and much anticipated US tax rebate. The problem is that instead of a new TV, it looks like that check is going to go 100% to the fuel bill. Worse, 50% of these funds leave the country to pay for oil imports, a complete economic drag. The velocity of money is significantly reduced via higher energy costs with very little resultant knock-on economic activity. Bottom-line, for the US consumer, higher energy costs can be zero-sum. Moreover, higher US natural gas prices could cost consumers another $50 billion this year and higher costs for oil, gas and coal WILL result in higher electricity prices over the next year, albeit with a delayed impact.
Note that oil prices are actually on track to average $40 per barrel higher in 2008 versus last year, thus costing consumers $300 billion y/y. Of course, these are all the observable “direct” costs. Who knows how much the dramatic increases in energy costs results in higher “indirect” inflation. The point is that there is likely to be much less consumer funds available, particularly for maintaining a household. The change in energy prices will most likely increase the rate of mortgage defaults, as certain homeowners are forced to throw in the towel. It will be interesting to see of the market can continue to rally as the energy impact becomes more pronounced?
The fed faces a significant choice next week. Either cut rates to assist mortgage holders, or fight the oil price increase by keeping firm on rates. Neither prospect is too appealing.
On to oil stocks: One of the purest plays on the higher oil price is Occidental Petroleum (OXY - $85), which this year should produce close to 470,000 barrels per day of high quality and even higher profit margin crude oil. Almost 80% of OXY’s output is oil, with the balance being mainly US natural gas production of 550 million cubic feet (mmcf/d). The company has zero refining (which is a good thing given current poor US margins) and a small chemical arm. At an average oil price of $105 per barrel this year and a gas price of $9, I calculate that OXY could earn $8.50 per share, up a solid 62% from clean, operating earnings of $5.25 per share in 2007. Thus, the stock is now trading at a P/E of 10x 2008 projected EPS. Cash flow could grow an impressive 45% to $11.75 per share versus $8.10 in 2007. Wow! More importantly, I project free cash flow could be over $6 billion this year, or over $7 per share in FCF. Double Wow!. That is after spending $4 billion on growing the business. With only 7% debt-cap, that is a lot of FCF for dividend hikes and stock buybacks (OXY has doubled the dividend over the last five years).
OXY is different from most E&P companies because it has lower capital requirements, which results in much higher FCF, and long life reserves. Reserve life for US oil, which is 75% of total oil reserves, is almost 18 years, which is practically unheard of in the industry. Obviously, if a company runs out of reserves, its earnings and cash flow should be valued less. OXY has long life, which is critical, in my opinion.
OXY is scheduled to report on Wednesday April 24. Consensus is at $1.95. I think they can do closer to $2.00 per share for 1q08. It does not really matter. These are not tech stocks where every penny counts. The point for OXY is that EPS could be up 110% y/y. That is why these stocks are working – the growth in earnings and cash flow is huge. Moreover, EPS are almost certain to be higher in 2q08 given that the oil price averaged only $97 per barrel in 1q08. As we know, it is up another 20% since then. Look, everyone has their favorite exploration and production stock. APA, CHK DVN, EOG are all great names. My point is that they are already up 30% - 50% this year alone. OXY is up only 10% year-to-date, yet OXY almost has more free cash flow than the other names combined (almost, not quite, but the point is the same).
DISCLAIMER: OXY is an interesting idea, not a recommendation. I own the shares, but I know that if the price of oil collapses, so too will OXY’s stock price. Also, ideas may be worth exactly what one paid for them.
In my three rules, the very first one I state - which I consider the most important - is to never lack a stop price. I had a position on OIH. I had a stop at $195. And as it, to my amazement, approached that level, I simply cancelled the stop.
That was really, really dumb. My "three rules" were crafted over many years of hard experience. I say "no exceptions" for a reason. Telling myself I'd ride out the tide and see how it goes was the kind of mistake an amateur makes.
Well, you know how this story ends. OIH kept grinding higher and higher, and once it reached $208, I couldn't take the pain anymore, so I sold my puts at a far greater loss than if I had simply let the stop do its work.
Now, at this point, there is a possibility OIH could temporarily top out and weaken. But - - again - - simply hanging onto a position and hoping for the best is idiocy. Shame on me.
OK, enough self-flagellation for the moment. The market continues to be far stronger than I'd like to see. Yeah, the Dow fell a little today, but I still think we're in "retracement-land". I am watching, for example, the $MSH. I am OK with it so long as it stays beneath that horizontal line.
One key component, of course, is Apple, which reports after the close on Wednesday. Errr, needless to say, everyone is going to be watching this like a hawk after-hours, particularly given GOOG's incredible blow-out last week.
As for oil - in spite of my debacle with OIH, I still have a lot of oil-related shorts. Chart-wise, there is a lot of interesting activity here. BHI has fully retraced to what I consider a face shorting zone.
And CVX - even on a day when oil hit yet another record - is showing weakness. I'm thinking "quadruple top" when I look at this.
My martyr complex is on full-blast right now, so I'd say the video below represents my vision of what a Slope Convention in Vegas would be like in August. A few of the dramatis personae......
When I was in the 9th grade, one of the classes I took was called Introduction to Business. I clearly remember one day they wheeled in the TV and played a National Geographic special called "Gold!", which was a breathless documentary about gold and its import to the world. The teacher also handed around a Krugerrand he had brought into the class. As it was being passed from student to student, he told us how "gooooooood" it felt to hold. The fact I remember it after all these years speaks to the experience. This is what gold looked like at the time of this little event in my life...........
What I didn't realize at the time is that when gold mania reaches so far down that 9th graders are talking about it, the mania is probably pretty near the end. I daresay the red circle, drawn below, is roughly where this little talk took place in my class.
As you can see from the graph above, gold spent the next two decades doing absolutely nothing (there were gyrations along the way, but gold bugs spent all the 80s and 90s being disappointed).
And it isn't that gold was the only commodity in history to experience a bubble. Even something as pedestrian as sugar made the late 70s run in gold look like nothing. Just take a look at this:
.......but yet again...........
Does this mean that everything that goes up goes right back down? No. But, unlike stocks, commodities do tend to be relatively cyclic and price-bound. In other words, a stock like AAPL which goes from $5 to $200 isn't necessarily doomed to returned to $5. But something like Gold isn't going to go to $1,000 and stay there forever.
Now, just to be clear, I look at futures simply as an interested chartist. I've never traded a futures contract in my life. I'm more interested than usual in commodities these days simply because of the huge bull run in commodities that we've seen the past few years. But I think it would be instructive, especially for those that don't typically follow futures, to take a look at a few of these charts. Please keep in mind that these charts span decades.
First, here is Corn, which is near highs never seen before, and even pierced that multi-decade upper trendline.
Of course, there's crude oil, which in 1999 was approaching $10 per barrel (seems like science fiction today, doesn't it?) People used to think about triple-digit crude prices as something unfathomable, but it seems we've all become accustomed to them very quickly. But in this entire graph, there has never been a market like this for energy (the Gulf War in 1990-1991 was just a blip in the grand scheme of things).
And our old friend gold, which has exceeded the (admittedly not-adjusted-for-inflation highs) levels set nearly 30 years ago.
And, the highest flier of them all - - of all things - - wheat:
When is this all going to end? No one knows. After all, gold went up eight-fold during its last madness in the late 70s, so an eight-fold run this time would push it to $2,000 per ounce. And some very smart people - like Jim Soros - believe the "big top" in commodities is still years away. But I can't help but be skeptical of how much more these markets can run.
I'm always pleased to hear from Slope readers, but some really stand out. One gentleman wrote me a few days ago - he's an energy analyst based in Boston - and he had some interesting insights on the energy markets. His email was so good, I asked (and received) his permission to publish it here. If any of you want to contact this gentleman directly, drop me a line, and I'll pass your email on to him. Here is his post..............
I trade energy stocks for a living after having covered the sector for 20 years on the buy and sell-side.
Oil and OIH now reside in an uncharted world. Specifically, SLB actually misses 1q08 EPS by 5% and the y/y was a paltry 10% (versus 63% y/y in 1q07, 82% in 1q06, 38% in 1q05 and 81% in 1q04); yet, the stock explodes higher yesterday propelling the move in OIH.
My fear in looking at your chart on BHI is that this stock is going back to $100.
Consider oil over the past five years. First driven by low inventories, myth now debunked; then lack of spare OPEC capacity, now debunked; then hurricane issues, debunked; then the Iranian issue, now debunked; then it was all about the dollar – Now debunked. Dollar rallies sharply on Friday, gold goes down, but oil soars to new highs. Oil is on its own mission. The move higher sows the seed of its own destruction, but who knows where the point of pain exists.
Aside from housing, the single biggest reason to remain bearish is oil. The commodity may continue to explode higher until it crushes the economy and US, European and Japanese stock markets. WTI oil averaged $72 per barrel last year. This year could/will be $40 per barrel higher – that’s $300 billion in higher oil costs alone to the US consumer, or almost 3x the so-called stimulus package.
The problem with shorting energy stocks is that fundamentals do favor the pure producers (not so the refiners or big oil).
I am glad we are able to make the connection as I have truly enjoyed your comments, which often exactly capture the mood of the markets.
The next several days are critical for oil and energy stocks. The May futures contract expires on Tuesday April 22. Crude needs a rest, but if it does not pull back at expiration, certain producing stocks are going to break-out to even higher highs. The reason is that the operating leverage for some of these companies is HUGE. The key is to focus on companies with high quality production assets, long reserve lives, AND low marginal tax rates. APA, CHK and OXY are three of the best examples. You have posted on APA, and the chart does look extended, but at $116 oil and $10 gas, the earnings and cash flow is there to back it up. I am not long APA at $140. I am quite long OXY and CHK. The former is perhaps the single best equity play on oil and the latter = one of the best plays on natural gas. I will explain more on these two names in a later missive.
The huge difference between energy, housing and tech “bubbles” is that the energy companies actually have real EPS, cash flows and improvements in net asset value. The numbers at $100 + oil are staggering. For the industry, it is not about the % change in commodity price, it is about the absolute number.
I have been out of the OIH for the last year, after catching big runs in 2004 and 2005. The reason is that despite a great oil price, revenue and EPS growth RATE is slowing for the service sector, which I consider to be a key driver. I admit that I don’t understand the move in SLB on Friday, unless it was option expiration.
On the short side, the higher crude goes the worse it is for the refiners (VLO, SUN, MRO, TSO etc). Product demand in the US is negative, which has killed margins. Also, big oil is quite vulnerable at these levels. As a pair-trade to the producers, it looks worthwhile to be short XOM, with smaller shorts in BP, COP and CVX. The market does not yet know how bad refining earnings will be for the big boys until 1q08 EPS reports next week. Also, if crude going higher cracks the stock market, I project it will take down the big index names like XOM and CVX. The risk for me is that the reverse is also true. Lastly, if oil goes much higher, government is going to be forced to get involved. The window for me is that the so-called market pundits have not started picking up on how devastating the financial flows are for the global consumer at $120 oil.
The math is pretty easy because the US consumes 7.5 billion barrels of oil and oil products each year.
In sum, I have been involved in stocks for almost 30 years and this is the most dynamic, intellectually challenging period I have ever experienced. I will be back with more details on certain names, but in the mean-time, please take a look at the charts on OXY, CHK, XOM, COP and CVX. I value your insights on this sector.