Rally Mode?

oil tankers

One of the liveliest discussions on our investment club page lately has been the Oil Rally.

As you can imagine, there are two camps.  Those who believe a breakout is occurring and those who, well, are skeptical. 

I have to admit, I was in the minority, at first. 

I looked at the charts and saw most oil indexes such as XLE at the top end of the Bollinger bands and in over bought territory.  Throw in the on again/off again OPEC talk of a production freeze and you have the perfect setup.

A setup for failure.

High probability trading says that the chart will go down.  High probability hype says OPEC will never agree to production freezes, especially with prices seemingly to recover.

But then I decided to look a little bit deeper.

I started looking at the basics of supply and demand.

I thought to myself, “what about all those flotillas of oil tankers we heard about six months ago just sitting out at sea?”

Well, apparently they are all moving to port to be processed. 

Rig counts are consistently going up to meet demand and even the exploration companies are starting to wear shades because the future is looking bright.

And just to prove a point, IBD ran a whole article on how to cash in on the rally.

So is this a case of the rally is really happening or has the best part of it already happened?  After all, if the big publications are writing about it, chances are it has already happened.  Or at least already started.  I have to admit, some of this stocks have nearly doubled in the past year. 

Does this mean that getting in now is just chasing ghosts, or has the market truly turned to the upside?

Even though the charts say to be careful, maybe there really is something to this rally after all. 

This has prompted me to start an oil rally watch list.  Now, it is just my first cut at it and I am sure it will change over time but here it is.

FANG

PE

HAL

SLB

CXO

CPE

RSPP

NFX

CLR

So, what do you think?   Has the outlook for oil really turned the corner and entered Rally Mode, or are we all just following hype now and setting ourselves up for a fall?

Expectations – Setting The Bar Low(er)

Low Bar

When it comes to the economy and the upcoming quarterly reporting season, it is all about expectations. And lately, those expectations are going way down.

How Low Can You Go?

With estimates for Q1 as well as Q2 still going down. It is hard to see sentiment changing in any meaningful way without any improvement in the earnings outlook.

Four short months ago some pundits were anticipating as much as a 0.7% rise in quarterly profits throughout 2016. And those expectations, believe it or not, were considered really good! Good enough for the fed to start to raise interest rates and break the QE cycle.

Fast forward to today and many analysts are expecting a 9% decline in profits with the biggest drag on the results coming from the energy sector. Take the energy sector out of the equation and one is still left with a 4% decline.

How Bad Is It?

Just three sectors are expected to post a rise in quarterly profits – healthcare, telecom and consumer discretionary. Even within these seemingly rosy sectors there are some notable thorns such as Apple is expected to post at least 10% lower profits.

And that is where the bar comes into play.

If analysts set the bar low enough so that even bad earnings seem good then the perception and expectations just might appear to be better than they really are.  In other words, easier to beat.

So far, in my opinion, they have not been able to do that.

My plan for investing this upcoming quarter is to stick with what has been working. Tech, some Healthcare and Discretionary stocks which had surprises last quarter.
Most of these companies are leaders or at least in the top tier of their industries and have shown consistent performance thru good markets and bad.

On a side note, there is a free newsletter I subscribe to, called The 10th Man, that had a very good write up regarding betting on the favorites. The winners, the industry leaders and not the losers or, in other words, the out of favor stocks stuck in downward trends. This falls into the stock investing strategies of don’t catch a falling knife and follow the money. I highly recommend signing up for all the free newsletters offered by this site but I especially like this one.

BTW: Whenever I am at the racetrack, which is usually on my wife’s and my anniversary, I never bet on the favorite to win. However I will usually bet on the favorite to show.

And now a question for my readers.

With the upcoming OPEC meeting in mind, do you think a strategy of buy the rumor – sell the news is worth considering? The anticipation is that an accord for capping production will be reached among the majority of members – excluding some notable names like IRAN. The theory being that even with their exemption(s), an agreement among other participating members will account for a production cap on 70% of the market. Pundits and analysts alike are thinking this is a good thing for oil prices – and for the world economy. Is a small position in an ETF like XLE with just this sort of “anticipation” in mind, a worthwhile play? My guess is that as time sets in folks will realize that we still have a glut of over-supply and the price of oil will at best stabilize if not go back down.

What do you think?

Buy The Rumor, Sell The News

oil-well

This past week was a great example of buy the rumor. It all started a week ago last Thursday with a report that Venezuela was pushing for an emergency OPEC meeting to discuss cuts oil production. All this was to help stabilize the oil market.

All the “experts” said Saudi Arabia has no intention of cutting oil production nor do they want to meet.
So the “experts” gave it next to zero chance of happening.

But the markets loved the thought of stable oil prices. So they picked up the rumor ball and started looking for others to join in and play, building hype and hope that things would get better.

Then last Monday, a meeting was held and three nations agreed to not increase production if other nations went along.

Game On!

And the “experts” were still doubtful but now gave an agreement a 20% chance of happening.

By Wednesday we had Iran, the one country everyone said would never agree saying they supported any effort to raise the price of oil. But not actually agreeing to the agreement.

Note: This was actually a beautiful setup. The Saudi’s are not going to do anything EVER to allow Iran to regain market share and wealth from selling oil. And yet we had this concept of a plan which on the surface appeared to provide hope but in reality only reaffirmed that current record production of oil isn’t going to stop and thereby keep pressure on Iran. And Iran knew this but said hey, any idea that raises the price of oil is fine with us.

And then UAE stepped up to support the agreement.

Suddenly the odds were looking closer to 50/50.

Wall Street has a funny way of computing odds. By now there were only 4 out of 13 OPEC nations and 1 non-OPEC nation agreeing. Hardly 50/50 but hey, it’s Wall Street. They do funny things with numbers all the time.

And the price of oil had shot up over 15% in less than 5 business days!

And yet none of these countries had actually said they were holding production levels much less cutting production. Only that they would hold production at the current January output if all the other countries agreed.

I had lots of questions from the very beginning such as:

  • Is there a timeline for getting everyone on board? In other words, if in 30 days a quorum is not reached then they go back to business as usual?
  • Can the currently agreeing nations increase production until all other nations agree? After all the agreement is not binding until if and when other nations agree.
  • How is anybody going to get Iran and other nations like Iraq to ever agree to cut production just when they see the light and profits for the taking at the end of the sanction tunnel?

But none of those questions mattered to the market. A market that was begging for something, anything, to stop the slide of oil. And by Wednesday the rumor mill and game of hype and hope was in full swing!

Then the inventory report came out Thursday morning at 11:00 am and showed levels continuing to rise!

Sell, the news!

Oil stocks and ETF’s fell.

All three market indexes suddenly stopped their wonderful three day rally.

If you had not sold your calls or momentum stocks before this morning, and replaced them with puts, it was too late.

When Janet Yellen Speaks

This week I have read and heard a plethora of speculation, hype, fear, both from the press, my fellow investment club members and bloggers.  Here are just some of the topics.

Janet Yellen
Not including Federal Reserve Meetings, Janet Yellen has either testified before congress or given a speech / report four times in the past year.  This week she testifies before congress regarding monetary policy. Let’s see what has happened before and after previous speeches and testimony.

• 2/24/2015 Monetary Policy – Congress
• 7/15/2015 Monetary Policy – Congress
• 11/4/2015 Supervision and Regulation – House of Representatives
• 12/3/2015 Economic Outlook – Congress

yellen speaks

Three out of four times the market was in an uptrend before her speech.
Two out of four times the market went up, briefly, very briefly, after her speech.
Four out of four times the market was down within two weeks or less.
So, would you say she is a market killer?
Perhaps it doesn’t really matter what she says?
Perhaps reality and overall market conditions will dictate not only what she says but how she says it?
And her speech will ultimately only serve to confirm market conditions.

 

A Chartist’s Heaven / or Hell
Since we reference one chart already, lets take a look at another.

qqq

What do you see?
Do you see a major support level being tested or failing?
A classic bounce? Or a classic failure setup?
Do you see a Head and Shoulders Pattern?
Do you see a 50/200 Death Cross?
Do you see the last Death Cross actually resulted in a positive uptrend? Off of said support level?

If one were to be truly technical about this I could also add that the left shoulder actually broke above a rising triangle pattern as well as the 200 line.  The right has not and in fact fits more of a continued lower highs and a descending triangle pattern.
If you were to ask me why my head hurts, it is because I keep pulling my hair out trying to make sense of ten billion chart pattern interpretations.
NOTE: Here is my short answer to all of this so far. Again, another discussion I have had . . .

“After all, who or what is left to lead the market in a broad based rally?”
Nothing !

To quote the BORG: Resistance is futile. And so are support levels without some fire to push the ashes up higher.

I don’t know when it will happen, but until conditions change, I do not see current support levels holding up and the market will experience another drop.

So what to do?

Here is an idea . . .

It’s Sunday.  Take the day off.   Watch the Super Bowl.  Watch the Puppy Bowl.  Watch the insanely expensive and entertaining commercials.

It’s what has made this great country of ours what it is today!

You could even watch reruns of the presidential debates!

And don’t forget, this is the last weekend before Lent.  So be sure to finish off all the beer and wine in your house!

Until next time.

Trade well my friends.

Weekly Stock Bites – Good News, Bad News

stock-market-analysis-cup-coffee

After a successful bounce off of a key support area and a two day rally, all eyes and ears will be focused on the direction of the market, the price of oil, quarterly reports and the Federal Reserve meeting. That my friends is a lot to digest.

Well, we have some good news and some bad.

Analysts are expecting another quarter of decreasing revenue and earnings. Depending on who you ask, this would be at least the third straight quarter of lower revenue and earnings. That my friends, qualifies as a trend.

To compensate for this, most analyst’s estimates have been lowered even more. The hope is that companies will be able to beat these depressed estimates. Thereby, looking good.

I’ll let you decide which one of those is the good news.

Not impressed

Personally, I’m not impressed with either one.

The price of oil went up this past week.  That is good news.  The bad news is, if you believe the “experts”, the price needs to stabilize in order for the overall markets and investors to feel confident and put a halt to this bear market. Unfortunately that “stabilized” price target is somewhere north of $40. So until we hit that, this upward movement in oil is based on hope. It’s OK to buy hope. Just be prepared to sell the news.

Oh, and last but certainly not least is the Federal Reserve meeting. Will Janet Yellen come out and say . . .

Oops!  You know what I said about all those interest rate hikes? Well, never mind.

Or will she attempt to spread feelings of calm and peace throughout the markets in an attempt to show that things really are looking up?  I’m willing to bet she will try to sell us hope and warm fuzzies.  Again, buy the hope and even some warm fuzzies. Be prepared to sell the news.
So what does all this mean?

Is the market reversing off of a double bottom and signaling the return of the bulls?

Or is this simply a dead cat bounce before the market continues its bearish down trend?

dead_cat_bounce

In my last post I reiterated the possibility of the market entering into neither a bull or bear market but rather a consolidation range. They key to this is what happens with key support and resistance areas.

Key support is another test of the previous lows.

dead cat bounce or successful test of support?
Dead cat bounce or successful test of support?

Key resistance is between 1950 – 2000 for the S&P. Any positive breakout above this area would signal, at a minimum, a potential break of the downward trend.
Until next time.

Be Good, Trade Well, Have Fun!