Oil has started to rise leading to plenty of comments concerning supply/demand and the oversold state of the sector. iShare Energy Index (NYSE: IYE) has bounced 6.3% the last two days and the futures are pointing higher today. The chart shows a break of the short term downtrend line and momentum is pointing higher. So is this the proverbial bounce everyone has been looking for? More than likely the answer is yes. However, there may be more at work here than just a bounce. Companies like XTO Energy (NYSE: XTO) are rumored buyout candidates showing some M&A activity could be on tap. It would only make since if the price of such companies have fallen 40% or more in some cases. Taking into account the discoveries in natural gas the values seem cheap looking longer term than next quarter.
While oil is the driving factor in how many of these companies are viewed natural gas, pipelines, etc. are part of the valuations going forward. Fundamentally speaking there is value here for the buyer who is willing to hold longer term. The big question is will the major oil companies like Chevron (NYSE: CVX), Devon (NYSE: DVN), Conoco (NYSE: COP) and Exxon (NYSE: XOM) start acquiring these type companies? Seems like the logical thing would be to acquire on the cheap companies that have proven wells along with new finds without the risk of exploring and drilling. It could be time to dig into the sectors stocks and start looking for value like XTO Energy (NYSE: XTO) and Chesapeake Energy (NYSE: CHK). Something worth watching as this develops further.
Tropical Storm Fay, for those of you in the dry area of the country, is sitting on top of Melbourne, FL. As coincidence would have it that is where our offices are located. So far we have had more than 11" of rain in the last 15 hours. That means flooding! If you have tuned into the weather channel or other news you have seen pictures of our lovely streets full of water. The good news is the storm has stopped moving and is expected to dump another 5-8" of rain. So needless to say we are working remotely from our homes to get data out between all the fun of the storm.
The projection was for some rain and wind as the storm passed to the west through the center of the state. However, the storm had a different opinion and the center passed over us and has now stalled providing us more rain than we ever asked or imagined. These projection by the weather forecasters are very similar to the analyst and of course people like me. We all spend our time studying and applying our trade to help others as well as ourselves manage money. But, when it is all said and done it is a hypothesis that will either be right or wrong. The key is being prepared for either event. Having lived in Florida my entire life, hurricane preparation is nothing new. The same should be true in building positions within our portfolio. You have heard me say it many times, before you take a position answer the three questions. How do I get in, how do I get out and where am I going. Simply put, entry, exit and target. This allows you to be prepared if your hypothesis doesn't work out.
A recent example of this was the downside in natural gas. Looking at (NYSE: UNG) you can see a nice uptrend in play, if you owned it you were on happy street. After hitting a high near the $64 mark the picture turned ugly. The storm warnings were for a small sell off and then a bounce. Of course it did not play out that way and if you didn't have a stop in place you had more damage than you should have. This goes back to my earlier point, entry, exit and target. The exit in this case could have been as simple as the 50 day moving average. Building a hypothesis is one thing, having a strategy for implementing it is another.
This is how the markets have been over the last 12 months. No matter what the expectations, they have either been worse, i.e. financials or they've been better than expected, i.e. retail. Either way, our best laid plans for our portfolio have been challenged along with our mindset towards managing our money. Be prepared, define your entry, exit and target prior to implementing your hypothesis.
Obama lays out tax increase to pay for more government. Capital gains and dividend taxes would go to 20% versus the 15% they are currently. That means an extra 5% of your hard earned gains on your money goes to the government. To put it in simple terms if you worked hard to accumulate money for retirement and earn $50,000 in capital gains on your money, you get to send in an extra $2,500 according to this plan. I understand there is more to his plan, but this was enough to send me down the street yelling. Why? I have read the rationale of tax the rich. But let’s face it the rich are already paying all the taxes. Between high income earners and corporations 92% of all the taxes are collected. How about cutting government? That would be a unique twist on things. Don’t get me stated on the proposal to hike social security taxes.
Okay let’s look at some sectors so we can earn enough money to help Obama out. One place I would like to revisit since our last conversation, the dollar. At last look the greenback was breaking above the 77 mark on the dollar index (DXY). After consolidating between March and July the breakout is significant in many ways at this point both economically and investment related. The long consolidation period is important to the upside and as we see looking at a daily chart the rise has been quick. In browsing comments by analyst and others the common belief is the dollar will not hold the gains and this is a reaction to the slowing economies in Europe. I agree with that to some degree, but there is still the fact the Fed has not hiked rates. I could see some resistance at the 77.76 mark short term and then a potential move towards the 82 mark. You can play the dollar through ETFs such as UUP which is PowerShares Dollar ETF. Short term look for a pullback on the rise to maybe the 10 day moving average and then a potential move higher from there. Watch economic data releases as they will have a potential impact to the index. Other ways to play this move would be to short the euro, yen, pound, etc. against the dollar move. This can be done through ETFs as well. Borrowing the shares could be a challenge with some clearing and brokerage firms.
The energy complex continues to struggle as the price of crude drops. I have discussed this in several pieces so today I wanted to take a detour to one of the alternative energy ETFs. FAN which is the First Trust Global Wind Energy ETF launched in mid June has fallen from $31 to $25. The 19% decline has been in related to the decline in crude and the energy sector overall. So why bring up this bad news? Simply because the outlook for demand on wind energy has not declined and this is something worth putting on a watch list somewhere. Yesterday Vestas Wind Systems (VWDRY), a wind turbine manufacturer, announced strong second quarter net profit. They stated they have a backlog of orders for the balance of 2008. The reaction from investors to the decline in crude prices has been to exit the sector along with anything related. This brings opportunity and this is one I will be watching.
Scanning through the country specific ETFs the last week isn’t a pretty picture. This is evidence of the news concerning the declining growth in Europe. Asia is showing signs of slowing as well. Hong Kong announced 2nd quarter GDP growth at 4.2% versus the expected 5.3%. This as I referenced above is helping the dollar move higher. It is also pushing gold lower. Overnight gold fell to $785. The metals continue to come under selling pressure and if you are still invested here you need to revisit your objectives and the use of stops. This could get worse if the dollar bandwagon riders proceed with the parade for a stronger dollar. On the other hand, this could be an opportunity if gold gets oversold short term. Either way I am waiting this one out on the sidelines.
This weekend I am teaching at a conference for individual investors. While talking with them it has become apparent they really don't know what they want when it comes to investing or trading their money. The number one question I am being asked - "is the bottom in?" While that is something to look for off of any correction or downtrend, the key issue is can you define why you have each position in your portfolio?
Gold has declined steadily from the high on July 15th which coincidentally was the day the bottom was put in on the S&P 500. As I write this the price of (AMEX: GLD) is $88.14 and the 200 day moving average is $87.47. The important part of that statement is the 200 day moving average which has been a key support level. Momentum is negative short term and we have signals of the ETF being oversold short term as well. This begs the question of bounce or break lower? Many analyst are calling for a bounce. While I am not ready to say not true, there is plenty of data pointing to the downside. Commodities continue to trade lower. The dollar has gained some near term strength and indicators are saying inflation is subsiding from the hot pace of the last quarter. Not disappearing, just calming some. All of this together makes the near term call on gold a roll of the dice. Too many what if’s for me to want to venture out and say definitively one way or the other. Thus, the play here would be to let the market tell you the direction. Just as we discussed with Natural Gas last week. On Monday we got the answer on that move. (AMEX: UNG) broke below short term support falling more than 8% to continue the downtrend. Watch patiently to see how gold plays out before committing money in the wrong direction.
Quietly the dollar has been moving higher based on the dollar index. After hitting a high of 74.15 on June 13th, we established a new downtrend and a low at 71.31. Last week we broke above that trend and resistance of the 50 day moving average. Here we are today at 73.28. What does this mean to our portfolio? As you know I am of the opinion we need the dollar to strenghen to get the economy back on the right track. The first big plus from a stronger dollar is lower oil prices since crude is mostly priced in dollars. Secondly, we would stop importing inflation on goods. Gold would decline and potentially we could head off the rising inflation issue facing the US.
How to play this move in the dollar? You could trade the currency through futures or you can look at an ETF based on the US dollar. Proshares has two ETFs based on the dollar, (NYSE: UUP) is for playing the dollar moving higher and (NYSE: UDN) is for playing the dollar moving down. In this case you would use UUP. The chart shows clearly the break of the downtrend in play off the June high today.
Another option would be to short another currency ETF you believe will fair poorly against the dollar. For example the euro ETF, (NYSE: FXE) has moved down over the last week from $158 to $156 with the gain in the dollar. (NYSE: FXY) is the ETF for the yen and (NYSE: FXC) is the ETF for the Canandian dollar. There are others for various countries and their respective currency. I mention Japan and Canada because both charts show the currency at a key support level which if broken would give way to a nice downside play potentially against a strengthening dollar.
Doing some internet gymnastics this weekend, it was not surprising to find the number of headlines, articles and reports pontificating where oil was headed. Analyst opinions are all over the board. Short term conclusion? Flip a coin 10 times and you will have an equal chance of being right. Technically we can make the argument oil is oversold and due for a bounce. That opinion is rationale and logical to some degree, but so is the argument for oil to fall to $100 or even $80 for that matter. The challenge for you and I as investors is to step back from the emotional hype and ask why we would want to invest in oil now to begin with?
Why play in a sector that is emotional to say the least? As investors we are drawn to the excitement of hot sectors like a moth to light. In reality if we step back and look realistically there is more risk investing in oil now than when the trend was up and moving towards $150. Talking about hot sectors stirs emotions and attracts viewers for the media. The answer to the question, should I be buying or selling oil short term, is a flip of the coin.
If you are looking to buy oil then you should be patient and let the downtrend run its course short term. Technically oil is oversold. But, that doesn’t mean it can’t become more oversold. Therefore, if I were are buyer of oil, I would be patient let a bottom be established and then play. If I were a seller of oil and I didn’t already own a short position, again I would have to be patient. We are at short term support of $98.80 on (AMEX: USO). If we were to break below that level you would have logical reason for taking the short. If we bounce look for a retracement and then take your short. The point is to have a logical strategy for playing long or short. Don’t allow the emotions or hype to suck you into a play you don’t understand or have not given some logical thought process.
Answering the question is crude oversold or going to $100, time will tell. If this were Las Vegas the odds would be on a bounce, but this is your money and sometimes it is better to sit on the sidelines and watch.
Pressure remains on the downside. This is a bear market short and simple. Yesterday’s activity shows the basis of the current bounce is just that. I discussed early this week my view of a 50-60% retracement of the May high. Looking at (AMEX: SPY) (ETF for S&P 500 Index) we had bounced 38% prior to yesterday’s pullback. This could have been prompted by profit taking or the fear of housing data as suggested by every media source in the known world. Or it could be any number of reason we could make sound logical. My question is more of whether the bounce is done? From my view that depends on oil. Earnings are not strong enough nor consistent enough to take this bounce higher. Lower oil prices will. Crude closed higher at $125.49. If we continue down near the $100-110 mark the rally continues.
Challenge near term, oil has already fallen more than $20 without attempting a bounce. What if… oil bounces $7-10 near term? The pullback towards the recent lows would continue. What if… oil then retreats to the $100-110 level? Equities would rally off the lower oil prices with the assumption it is better for the economy looking forward. Point? Oil once again is the leading indicator for equities.
What plays are there in all this activity? That depends on your risk tolerance and trading discipline. Two ETFs to play the movement in oil would be (AMEX: DIG) and AMEX: DUG which is ProShares long and short ETFs for the Dow Jones Energy Index. This is not a pure play on oil, but will give you a simple way to capture some of the move and impact. (AMEX: USO) would give you to direct play on oil by going long or short the ETF. (SPY) (S&P 500), (AMEX: DIA) (Dow), (NSDQ: QQQQ) (NASDAQ 100) would be the ETFs to play the major indexes on the move up or down.
The longer term outlook is a bear market and it is important to remember the primary trend when playing anything short term. Any plays need to be done with a disciplined strategy and make sure you have stops in place.
Plenty to discuss relative to the various sectors so I thought it would be good to outline a few. Let's start with the Treasury Bond and the yield creeping back near the 4.15% mark. The yield had moved back near the 3.8% mark a couple of weeks ago and we discussed this was a fear driven move. With equities regaining their footing over the last week we have seen the reverse higher on the yield and prices decline. Still looking for a move back near the 4.5% mark near term. IEF which is the 7-10 year Lehman index ETF (AMEX: IEF) has moved back towards support at $85.71. This would correspond to approximately 4.25% on the yield.
Oil is falling in price and I have a near term target of $120 per barrel. The inventory data today showed another build up in supply pushing the price down near the $126 mark. United States Oil Fund (AMEX: USO) has moved lower as well with the next support near the $100 mark. Energy was a negative influence to the markets heading up and thus far has been a positive heading down. ConocoPhillips (NYSE: COP) beat estimates and is trading down nearly 2% in sympathy with the price of crude. This is a sector to watch near term for opportunity.
EMC Corporation (NYSE: EMC) beat estimates and helped the technology sector bounce off yesterday's bad news. IYW which is the iShare ETF for technology (AMEX: IYW) found support at $52 and I am looking for a bounce back near the $56 mark short term. I continue to like the sector and would expect a positive move higher over the balance of the year based on lower revisions to earnings. The second half of the years revenue and earnigs from my view won't be as bad as some analyst are expecting. Worth keeping on a watch list.
Gold (NYSE: GLD) is getting bullied as equities come back into to favor. GLD has moved lower with support near the 200 day moving average. Worth watching espeically with the inflation factor still in play. Natural Gas (AMEX: UNG) bounced off support at the 200 day moving average. This is oversold and wort keeping an eye on as we have discussed. The drug sector has shrugged off the Merck (NYSE: MRK) data and is moving higher on the Wyeth earnings today. 200 day is resistance here for iShares Dow Jones U.S. Pharmaceuticals (AMEX: IHE) and break through this level would continue the bullish outlook short term. Biotech (AMEX: IBB) remains in the uptrend we discussed a couple of weeks ago and is playing out nicely as well.
The bulls are in play short term off the lows from last week. I am sticking with the 50-60% retracement off the low from the May high as a target on the bounce. If that plays out we would evaluate from there. We are still in a bear market don't forget! Make sure your stops are in place and stick to your discipline.
A sector we cover a few weeks ago during the breakout on June 30th the biotech. The index has continued to move steadily higher with the news surrounding the sector being bullish. The M&A activity sent Genetech (NYSE: DNA) soaring more than 16%on the day. What is interesting to me is to look at the difference in return for (AMEX: IBB) and (AMEX: BBH). First lets look at IBB, the ETF was higher today by 1.1% as the index was higher by 3%. The difference? IBB is the NASDAQ biotech index which doesn’t include Genetech in the index. On the other hand BBH is included in the HOLDr. That fund was higher today by 7% more than double the index. Again why? The simple reason is the weighting of the stock in the HOLDr is 38.7%. Herein lies the risk or reward of knowing what is in the underlying ETF. Much like mutual funds evaluating what you hold is important. IBB has 153 holdings from the NASDAQ index while BBH has 12 holdings. Both obviously have their respective advantages and disadvantages for investors. Make sure you know before you put your money in one.
The biotech sector continues remains in an uptrend as you can see on the index chart below. The break above 480 was the entry point we discussed and the break above 510 was a continuation of the move. I like the outlook intermediate term (9-18 months). The merger news has been expected as the larger drug manufacturers continue to look for ways to grow and this is one.
Energy stocks bounced today with crude gaining more than $2 today. Energy was up 2.9% and oil services was higher by 3%. The bounce was from the oversold conditions from last week. Coal higher by more than 7% after being down more than 17% last week. As I discussed in the podcast I was looking for these to bounce this week. They remain on my watch list short term. These along with financials are covered on this week’s podcast.
