The refiners are my favorite sector going into 2013.  Looking back at 10 years of history, when these things trend, they can trend very hard and persistently.  I believe we’re in the early innings of this rally off lows established from Summer 2011 thru Summer 2012.

I’m going to do it in basket fashion.  Some may get a few extra dollars allocated, but I am going to spread this bet amongst:
TSO
WNR
PSX
CLMT
HFC
MPC
DK
VLO
CVI
ALJ

Fundamentally, I’ll always believe refineries are as crucial to American capitalism as the Federal Reserve is to banking.  Remember 2007, when all the talk in that booming sector was that no new refineries had been built since the 1970′s… and the obvious and powerful “not in my backyard” attitude that keeps new ones from being built ?  Concepts like “why can’t we build more of these damn things?!?!” were widely thought about as people filled their tanks.

Well the root cause hasn’t changed.  These companies own plants which at the time were hailed as damn near irreplaceable gems, only to see their stocks walloped as the industry’s margins (comprised mainly of 321 Crack Spreads) turned negative, not coincidentally forcing the sector’s fall from favor.  I think that mantra will become mainstream once again before HFC is the beast of the bunch, both technically and fundamentally.  HFC makes more money than VLO, on about 15% of the revenue.  I still like VLO though, as their leverage could becme a margin-booster going forward (unlike in the coal sector at present).

One of my least favorite sectors is Nat Gas E&P.  The contracts the big ones have signed for leases are high compared to the price of Natty (even after its move from $2 to $4).  I’m envisioning Chesapeake (CHK) & Ultra (UPL) both in single digits by this time next year.  I also like RRC I’m debating between growing this basket with more individual stocks, or just adding to the trade using the ETF FCG.

Such sector trades can always be done individually, or as a pair.  The latter being a more risk averse strategy.  I like these either way, and but lemme make it clear I’m not recommending you the web surfer take any of this as investment advice.

Good luck out there.

Quick recap of last week:  1-0-5

Shorts

BWA set up perfectly as it put in a pause day, then fell immediately afterward.

CRM fell right away without retesting, then recovered quickly, it still looks like a shorting opportunity to me.

Longs 

APA and XOM  did not provide real entry opportunities but still look good to me.  And though it broke higher nicely, WPX  also did not provide a buying opportunity unless you took it early Monday morning.  CVX is still an open position. 

I still think that the oil names are due for a breakout as crude prices continue to increase.

This Week

Shorts

I will continue to look to short weakness on late-week pops in some down trending names. 

1. Agilent Technologies (A, the 1st one on the list)

Looking for an open within the body of Friday’s bar, and then a break of the low for an entry.

2. Computer Sciences Corp. (CSC)

Same type of setup as A, looking for a failed breakout of this descending resistance. 

3. E-Trade Financial (ETFC)

E-Trade looks similar to BWA last week to me, and I expect some hesitation at the first touch of the 50-day and then a retest of the 7.25 support.

Longs

1. Fastenal Company (FAST)

I like the upturning 50-day at the bottom of support as an inverse head and shoulders forms.  Looking to bracket entry Friday’s trading session with an open inside the range.

2. Apple (AAPL)

We saw Google breakout post earnings, and after a gap down to the 50-day, AAPL recovered nicely.  If AAPL breaks out of this overhead, I am a lot more inclined to think that the market is going to continue to roll on. 

3.  Nuecor Corp (NUE)

I expect perhaps some consolidation early this week but ultimately a break of May’s sideways action.

So, again I am split in my conviction this week, as there are a few short and a few long setups out there. I am still not a believer in this rally, but at some point you cant fight the trend anymore.  For now though, a hedged book seems to be the way to go for me.

Been a while.  Glad to be using this thought outlet again.  Thanks for getting it set up again, Daniel.

Biggest position recently has been a bet on the downside in gold.  It’s certainly counter-trend on a multi-year timeframe.  However with disciplined risk management, making this kind of call is a very acceptable risk.  My position here is not popular among the traders I’ve spoken with this week.  We’ll find out in the coming weeks who was right or wrong.  I’m OK with it either way.

One of our readers (and valued clients!) asked for more detailed charts regarding yesterday’s post about Europeans’ returns owning United States stocks versus those a US investor achieved.

The chart below shows both the Euro vs. Dollar relationship and the Dow Jones Industrial Average for the past 10 years. Euro vs Dollar is always quoted with Euro first, so that’s why the chart is going northeast rather than southeast.

The basic premise is that much of the rise in equities since the March 2003 lows — which occurred the day bullets started flying in Iraq — is attributable to the devalued purchasing power in the US Dollar rather than a true increase in value that can be exchanged 1-1 around the globe.

This same concept applies to the well-publicized moves in commodities, including the chart of crude oil below. If your currency is Euros, this long term chart does not climb nearly this steeply. Instead of being a 4-bagger since 2001, oil is only a double during that timeframe in Europe. That’s a tremendous difference. The same could be said for housing price increases earlier this decade — home prices rose, but against what? A US dollar ! They did not rise that much when priced in other currencies.

Here is a chart of the Dollar Index, which measures our greenback against a diversified basket of currencies including Euros (the biggest weighting), Japanese Yen, British Pound, Swiss Francs, etc. The dollar has of course faltered against all of its competitors since early this decade, and now sits at its lowest value ever since the index was created in 1971.

Long US Dollars, by default

If you’re a European investor who’s owned the Dow Jones Industrial Average since 2001, you’ve taken a much bigger beating than us dollar-denominated locals. The greenback’s plunge is of course the culprit.

The “Euro-Dow” sits at the equivalent of only 7200 — versus the true 11,300 close on Friday.

Thanks to Alea Blog for this startling chart.