Energy Pair Trade Idea

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.

Chart Setups for this Week (8/6/12)

 

Quick recap of last week:  1-0-5

Shorts

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

bwa 080612

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)

a 080612

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)

csc 080612

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

3. E-Trade Financial (ETFC)

etfc 080612

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)

fast 080612

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)

aapl 080612

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)

nue 080612

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.

This Week’s Chart Setups: Oil Looking Up

 

I will go through my top 6 chart set-ups for this week among S&P-500 stocks:

After a large pop and run in the indexes Friday of last week, I have begun to see some Oil and Gas stocks set up for some break-outs.  Oil put in a swing low showing some nice support on 6/28/12, and after a market rally on the last Friday of the month (much like this month’s final Friday), was able to continue to strengthen throughout the month.  After a slight pullback this week, I expect oil prices to increase, helping some O&G stocks break out.  Here are my 3 favorite setups for this week:

1.  WPX Energy (WPX)

wpx 072912

The “IPO Double Bottom” held nicely this month, and I would like to see a breakout from this wedge starting from the late March highs.  **Earnings Aug-2

2. Exxon Mobil (XOM)

xom 072912

3. Chevron (CVH)

cvx 072912

Both Exxon and Chevron are right at multi-year tops, which have been tested multiple times this year.  I would like to see some early week consolidation before a breakout to new highs in both names.  

4. Apache (APA)

apa 072912

I think after some consolidation in the mid-87.5’s Apache could break out pretty quickly this week.  It may have to come back and retest the ascending support 1 more time, but I look for more follow through this week.

I am not yet a believer in this market, especially given the news-driven, gappy-ness of last week’s rally. The setups usually don’t lie, but given the specificity of my favorite longs, I remain market-bearish.  My 2  favorite short set-ups for this week involve fading quick, strong Friday rallies into overhead resistance.

1. Borg Warner (BWA)

bwa 072912

I am skeptical of this breakout of a declining wedge, and expect some resistance at the 50-day MA.  I would look for a short term consolidation-breakdown or reversal bar after more upside movement. 

2. Salesforce (CRM)

crm 072912

I think that Salesforce will eventually breakdown and go to 0 (tech bubble style), but this week I expect a retest of the 50-day and well as the ascending resistance (as it did twice earlier this month).  I will be looking for a short term reversal bar to confirm, and then look to take it back down to the 126 support area. 

I’m Back

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.

Details On “Euro-Dow”

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.

DowEURUSD

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.

CrudeOil

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.

DollarIndex2008-07

Long US Dollars, by default

Think US Investors Have It Bad ?

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.

Absolute Return Strategies in Bull Markets

bullonknees.gifThere are occasions — sometimes years — when stock markets are so unrelentingly strong that a good active manager who was previously known to be “prudent” becomes viewed as a laggard. This most often happens near major tops in the stock market. Teresa Lo of PowerSwings.com discussed just such situations in a very interesting piece last year. I certainly felt similar pressures from clients and prospects while the indexes romped from mid-2006 to mid-2007.

At Teewinot, we’ve always contended that managers need to be judged for their performance over a reasonable period of time: encompassing up, down, and sideways markets.

True risk management is a definite hindrance to performance in persistent, strong bull runs. That is a fact. During those times — in hindsight — you do undoubtedly do best by just staying long (even better, adding leverage).

However, when the Bull is taken to its knees, legit risk management exactly what portfolios need. It’s not just what you make during the uptrend that counts. It’s what you keep.

Times Like These

cliffbike.jpgWe have been honoring some of my mentor RevShark’s words this week. Saved from a long-ago post on RealMoney.com, I break out this quote whenever the market gets dicey.

Keep the Damage to a Minimum.
If you can avoid taking a large hit now, you will be much better positioned when things get better.”

Words to invest by. Especially with the S&P 500 down 8.7% so far in June, it’s biggest monthly drop since the Bear market in 2002.

Client accounts are roughly breakeven over the same period.

Always a Bull Market Somewhere

warren-buffetAnd this one dwarfs what’s going on in the Oil patch.

A Chinese hedge fund manager just paid $2.1 million for lunch with Warren Buffett. As the figures show (source: Bloomberg), the value of this “asset” has absolutely exploded.. more than a 100-bagger since the 2001 low !

2000 Anonymous $25,000
2001 Anonymous $18,000
2002 Edward Jones Co. and 2 Anonymous $25,000
2003 David Einhorn, Greenlight Capital $250,100
2004 Jason Choo, Singapore $202,100
2005 Anonymous $351,100
2006 Yongping Duan, California $620,100
2007 Mohnish Pabrai, Guy Spier, Harina Kapoor $650,100

$18k to dine with one’s favorite celeb is a bargain basement price ? Wow.

(Not) Breaking News: Housing Woes Continue

crib.jpgThe latest Case/Shiller S&P data (for April — seems dated but whatever) showed home prices down an average of 15% from the year before. That’s huge. Vegas was the worst, losing 26.8% ! Interestingly, Charlotte fared the best, at breakeven.

Even NFL players’ homes aren’t selling well. Ousted Cincinnati Bengal Chris Henry’s house cleared the market at 2/3 of appraised value — and the bank itself was the only bidder ! Does that even count as a “sale” ?

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