Is Energy About To Take Off?

April 20, 2015

Important Week For Sector

The energy sector ETF (XLE) dropped 28% from its June 2014 high to the 2015 low. Last week, XLE completed the third and last step needed for a trend change. The higher high made on tax day (see 3 in chart below) tells us the odds of success in the energy sector are becoming more favorable.

Energy Has Been Consolidating

In a February 19 article, we noted that energy was worth having on the possible-investment radar. We have not taken a position yet – have we missed anything? Not really…XLE’s February high was $82.29…last Friday it closed at $81.91.

Sector Has Broader Implications

If energy can break to the upside, it would increase the odds of economic/market scenario three playing out. Scenario three, which involves a still-expanding economy, was described in detail on January 27.

Bigger Picture Is Also At Crossroads

If energy is unable to sustain its recent gains, it will tell us concerns remain about the economy and deflationary pressures. Like energy, the bigger picture is also at a possible point of resolution, which is the topic of this week’s stock market video.

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Video

Video

M&A Wave In Energy?

Another driver for energy could be an increase in mergers and acquisitions. From NASDAQ.com:

Royal Dutch Shell PLC’s (RDS-A) nearly $70 billion offer for Britain’sBG Group PLC may be the starting gun for a wave of oil deals that analysts and bankers have been predicting since crude prices started to slump in June. “This could mark the beginning of a M&A rave, much like the one we saw in the late 1990s,” Augustin Eden, research analyst at Accendo Markets, said in a note.

Investment Implications – The Weight Of The Evidence

A good baby step for the economic and stock market bulls would be for XLE to see a daily close above last week’s closing high of $82.70. If that energy hurdle is cleared, the next test comes at $84.62. Therefore, we may used a step-in approach if energy continues to have the “it may be turning” look. If the market rejects XLE at either level above, our concerns about the general market would increase. Similar guideposts for the S&P 500 include 2112, 2114, and 2119. The market will guide us if we are willing to listen with a flexible, unbiased, and open mind.

Oil rig image from mrpbps via Flickr.

Are The Bulls & Bears About To Resolve Their Standoff?

April 17, 2015

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Video

Video

Most Recent Comments Via Twitter

April 16, 2015

You can access them here (@CiovaccoCapital). You do not need to know anything about Twitter to view our comments or use the links to view charts.

Can The Bulls March Through Earnings?

April 13, 2015

Earnings Guidance

The stock market will be looking for clues about the strength of the U.S. economy when several big name companies report earnings this week.

Monday: Pep Boys (PBY)

Tuesday: CSX (CSX), Fastenal (FAST), Intel (INTC), JB Hunt (JBHT), Johnson & Johnson (JNJ), JP Morgan Chase (JPM), Wells Fargo (WFC)

Wednesday: Bank of America (BAC), Delta Air Lines (DAL), Netflix (NFLX), U.S. Bancorp (USB)

Thursday: American Express (AXP), Goldman Sachs (GS), Schlumberger (SLB), UnitedHealth (UNH)

Friday: General Electric (GE)

Are Cracks Starting To Appear?

If the market anticipates that earnings will usher in a new bear market, we would expect to see structural problems starting to form in the bullish foundation. This week’s stock market video looks for cracks in trends, the VIX, and market breadth.

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Video

Video

Investment Implications – The Weight Of The Evidence

Earnings will offer the latest read on the health of the U.S. economy. If guidance comes in below already low expectations, we may be forced into a more defensive posture. Given what we know as of Monday’s close, an equity-heavy allocation remains prudent. If the S&P closes below 2,039 later this week, our concerns would increase.

Binoculars image from Jeramey Jannene via Flickr

Stocks: Are Cracks Starting To Appear?

April 10, 2015

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Video

Video

Most Recent Comments Via Twitter

April 9, 2015

You can access them here (@CiovaccoCapital). You do not need to know anything about Twitter to view our comments or use the links to view charts.

How Far Could Stocks Fall After Friday’s Ugly Labor Report?

April 4, 2015


Report Released On Market Holiday

In a bizarre holiday reporting scenario, the most anticipated economic report on Wall Street was released on Good Friday at 8:30 am.

Futures Took Hit

While the stock market was closed, the S&P 500 futures traded for 45 minutes after the ugly jobs data was moved into the public’s field of vision. The knee-jerk reaction was not pretty; the futures dropped over 19 points and closed near the session low.

A Preview Of Monday’s Open

For those scoring at home, the labor miss on Friday was significant. From CNBC:

March’s report of just 126,000 nonfarm payrolls—about 120,000 less than expected—signals the potential for a rocky start to trading Monday. The stock market was closed for Good Friday, but in morning trading, Dow futures dropped 165 points after the report.

This week’s stock market video may help lower anxiety levels concerning a logical question - will the stock market blow through support levels after Monday’s opening bell?

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Video

Video

Fed Speaker Monday

It is always possible that bad news gets interpreted as good news if the Fed decides to throw the market a bone or two. To complicate matters for investors and traders, New York Fed President William Dudley is the first Fed speaker of the week when he discusses the economy in Newark Monday morning. The market will also be reading Wednesday’s Fed minutes closely looking for new clues about the timing of the first rate hike.

Why Was Bad News Bad News On Friday?

If bad news was always interpreted as good news, we never would have had a financial crisis (2007-2009). At some point, the big picture gets concerning enough that the bad news becomes more important than any good news the Fed can deliver. If we think in hypothetical extremes to illustrate the point, assume the economy morphs into a recession over the next few quarters…the market may begin to say:

“The Fed is out of traditional bullets and the economy and corporate earnings are in big trouble.”

How will we know when we have reached the “bad news is bad news” point of no return? Answer: When market-friendly comments from the Fed fail to stem market declines. While the market will decide when that point has been reached, our guess is we are not there yet, meaning if Fed President Dudley wants to talk up the stock market on Monday, he will be successful. When market-friendly Fed talk fails to have its desired effect, then risk-management takes a big step forward on the priority list.

Will The Labor Report Take Down The Bulls?

April 3, 2015

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Video

Video

YouTube Processing Is Slow

April 2, 2015

Should be available between 11:10 and 11:55 pm EDT (ATLANTA) Friday.

Could A Geometric Shape Save The Bulls?

April 1, 2015

Earnings Concerning For Bulls

In the markets, everything matters. Common sense tells us that stocks in the long run are tied to corporate earnings. Therefore, it is not particularly surprising that stocks have been going nowhere fast in recent months given the recent negative slant on earnings expectations. From CNBC:

Analysts are widely expecting S&P 500 companies to post their first year-over-year decline since the third quarter of 2012. U.S. markets struggled in the first quarter as investors worry over the impact of falling oil prices on overall earnings and the effect of a strong dollar on multinational companies, whose products are more expensive in foreign markets when the greenback firms up.

Bullish Door Not Closed Yet

With respect to earnings, the easy thing for investors to do is to extrapolate the recent bearish trend several months down the road. While earnings reports may meet bearish expectations, it is also possible that future guidance comes in above low expectations. Is there any support for the “things could turn out better than expected” scenario? Yes, one example comes from the easy to understand triangle formation shown on the weekly chart of the NYSE Composite Stock Index below.

Triangles Are A Reflection Of Conviction

Points A, B, C, and D in the chart below show a series of higher lows. The higher lows tell us that buying conviction has exceeded selling conviction at higher and higher levels in recent months. Another way to visualize the formation of the triangle is that dip buyers have been less and less patient since the October 2014 low. The higher lows are the good news for the bulls. The bad news is that based on numerous concerns, including earnings and the Fed, buying conviction has not been strong enough to exceed the “cap” (see orange line below).

What Does History Tell Us?

The formal name of the pattern above is an “ascending triangle”. According to Investopedia:

An ascending triangle is generally considered to be a continuation pattern, meaning that it is usually found amid a period of consolidation within an uptrend. Once the breakout occurs, buyers will aggressively send the price of the asset higher, usually on high volume. The most common price target is generally set to be equal to the entry price plus the vertical height of the triangle.

All patterns speak to probabilities, rather than certainties. Is it possible the bears seize the day in the coming weeks and stocks experience a correction? Sure, it is possible. Even if the bearish scenario plays out, the charts above can still assist us by giving us a reference point to spot a lower low.

A Bullish Bias, But Momentum A Big Concern

A reader of our recent posts may have a fair argument along the lines of “you clearly have a bullish bias”. The bias is the market’s and has nothing to do with our personal opinions at CCM. The following statement is factual…”the stock market has a bullish bias”. How do we know that? The hard data/facts still side with the bulls. The series of higher lows since the October 2014 low is observable…and it also leans bullish until the chart morphs into a series of lower lows and lower highs. While the weight of the evidence still sides with the bulls, a portion of the evidence is screaming “slowing momentum…be open to lower lows and a correction”. This video clip puts some additional context around some observable changes that would increase our concerns about the stock market.

Triangle image by pbemjestes via Flickr.