How to Trade the Price of Crude Oil

My high level thoughts are as follows:

Oil ($WTIC) will bottom out somewhere in the $20 range (when, I don’t know). OPEC is flooding the market with hundreds of thousands of barrels each day to force the price down to the point where most if not all American companies are forced to cease operations. The bankruptcies are already piling up from 2015 and will accelerate in 2016. Once the majority close shop, OPEC will pull back production and the price will increase (perhaps rapidly).

2016_02-06_WTIC-wkly

As it stands today, most American shale companies require crude to be at $60 per barrel to stay profitable. The leaders are getting by, by using efficient methods but the break-even point is still well above the current price level of crude oil.

Another thing we should watch is the proxy war between Saudi Arabia and Iran (hat tip to a friend on this perspective). When Iranian crude comes on-line, prices will drop again. Maybe that sends prices below $20 (unless already priced into the market, which it probably is). The United States and Russia will be squeezed tremendously, the question is, will the US bail out or prop up their oil companies (my guess is no, as that would be highly political, being oil companies). When gauging public opinion: propping up GM in 2008 is a lot different than bailing out the “big bad (& rich)” oil companies.

Bottom line: oil is not at the bottom yet and prices can drag along the bottom for a long, long time. But in the end, oil will come back up (it’s a matter of how long will that take). We just need to find the best vehicle to place this trade at the right time.

Do we do this using ETFs, leveraged ETFs (short term), futures, specific equities, etc.
Perhaps a combination of all of them, depending on the time frame of the trade.

I see crude a lot higher than it is today, 12, 18 and 24 months into the future but I haven’t determined the correct vehicle to make this longer term trade (ETFs decay, futures aren’t my game and individual equities are risky). I’ll keep you posted on my moves…

Charts: $WTIC $USO $UWTI $DWIT $XLE

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A Recap of Stock Trends for 2015

In the blog post, Stock Trends for 2015, twenty-eight stocks were identified as represented by six trends over the course of the year with the following results:

The lazy man’s portfolio had a total gain of 12.79%

  • 18 stocks ended in positive territory
  • 10 stocks ended in negative territory

NOTE 01: by “lazy man”, I mean that the 28 stocks would have been bought and held all year without any buy and sell rules. Clearly, the exercise was for observational purposes ONLY.

Comparison to US Markets:

  • NASDAQ: +5.94%
  • S&P 500: -0.69%
  • DJIA: -2.29%

Comparison to All World Markets:

  • All Markets (Average): -10.20%
  • Fifteen stocks logged double digit gains.
  • One stock logged a triple digit gain.
  • Six stocks logged double digit losses.
  • The big winner was Amazon.com, $AMZN, with a gain of 132.47%, moving from $290.74 to $675.89
  • The big loser was Barracuda Networks, $CUDA, with a loss of -47.40%, moving from $35.51 to $18.68

2016_01-02_AMZN_wkly

It’s interesting to note that CUDA was actually showing a 22% gain in April 2015, running as high as $46.78 before crashing in the summer and ending the year at $18.68.

Six of the ten leading gainers started with a triple digit share price while the bottom three losers all started below $40 per share. One may argue that this outcome further confirms the observation from William O’Neil:

“What seems too high and risky to the majority generally goes higher and what seems low and cheap generally goes lower.”

Of the six trends, the groups performed as follows:

Digital Wallets (currency) & Mobile Payments, +43.53%

  • The group was up a collective 43.53%
  • Companies in group: $AMZN $GOOG $V $MA $AAPL
  • 5 of the 6 stocks showed a gain
  • 1 of the 6 stocks showed a loss (less than 1%)
  • The leading gainer was AMZN at 132.47%
  • The leading loser was AAPL at -0.69%

Self Driving Cars (Future of driving), +37.35%

  • The group was up a collective 37.35%
  • Companies in group: $NVDA $GOOG $TSLA $MBLY
  • All 4 stocks showed a gain
  • The leading gainer was NVDA at 65.13%
  • The trailing gainer was MBLY at 10.48%

Drones & Unmanned Aircraft, +9.25%

  • The group was up a collective 9.25%
  • Companies in group: $NOC $AVAV $LMT $BA $TXT $LLL
  • 4 of the 6 stocks showed a gain
  • 2 of the 6 stocks showed a loss (both less than 5%)
  • The leading gainer was NOC at 23.14%
  • The leading loser was LLL at -4.90%

Biotech, +5.68%

  • The group was up a collective 5.68%
  • Companies in group: $REGN $ILMN $CELG $JUNO
  • 2 of the 4 stocks showed a gain
  • 2 of the 4 stocks showed a loss
  • The leading gainer was REGN at 32.83%
  • The leading loser was JUNO at -12.31%

Social & Web based brands, -2.43%

  • The group was down a collective -2.43%
  • Companies in group: $FB $LNKD $BABA $TWTR
  • 2 of the 4 stocks showed a gain
  • 2 of the 4 stocks showed a loss
  • The leading gainer was FB at 39.21%
  • The leading loser was TWTR at -37.98%

Cyber Security, -4.86%

  • The group was down a collective -4.86%
  • Companies in group: $PANW $CYBR $CHKP $QLYS $RDWR $CUDA
  • 3 of the 6 stocks showed a gain
  • 3 of the 6 stocks showed a loss
  • The leading gainer was PANW at 40.90%
  • The leading loser was CUDA at -47.40%

NOTE 02: none of the figures above include dividends
NOTE 03: Google (Alphabet) $GOOG is represented in two groups when results are separated by trends

Of the twenty-eight stocks listed in 2015, I will definitely give a look and consider the following heading into 2016: AMZN, FB, GOOG, V, MA, TSLA, BABA, CYBR

Although many of these stocks have been up for one, two or even three plus years, don’t let that discourage you until the trend changes.

“The trend is your friend except at the end when it bends.” – Ed Seykota

2015_12-31 - Watch List- Dec-sm

Stock Trends for 2016 will be issued shortly.

16 Trading Quotes & Books for 2016

“The obvious rarely happens, the unexpected constantly occurs.” – Jesse Livermore

“A speculator is a man who observes the future, and acts before it occurs.” – Bernard Baruch

“What seems too high and risky to the majority generally goes higher and what seems low and cheap generally goes lower.” – William O’Neil

“Successful speculation implies taking risks when the odds are in your favor.” – Victor Sperandeo

“Stocks are bought not in fear but in hope. They are typically sold out of fear.” – Justin Mamis

“Accepting losses is the most important single investment device to insure safety of capital.” – Gerald M. Loeb

“To me, the “tape” is the final arbiter of any investment decision. I have a cardinal rule: Never fight the tape!” – Martin Zweig

“You have to master your ego & realize that being profitable is more important than being right.” – Martin Schwartz

“Losing a position is aggravating, whereas losing your nerve is devastating.” – Ed Seykota

“If you spend more than 13 minutes analyzing economic and market forecasts, you’ve wasted 10 minutes.” – Peter Lynch

“Risk comes from not knowing what you are doing.” – Warren Buffett

“You must learn that the market is a discounting mechanism, and that stocks sell on future and not current fundamentals.” – Stan Weinstein

“I was successful in taking larger profits than losses in proportion to the amounts invested.” – Nicholas Darvas

“The first rule of trading – there are probably many first rules – is don’t get caught in a situation in which you can lose a great deal of money for reasons you don’t understand.” – Bruce Kovner

“Intellectual capital will always trump financial capital.” – Paul Tudor Jones

“I have noticed that everyone who has ever tried to tell me that markets are efficient is poor.” – Larry Hite

Stock Trends for 2015

I’m always in search of trends that may offer solid investment opportunities (using individual stocks) but at the same time may not be “bleeding edge” technology. The best performing trend trading stocks don’t have to be unknown or highly touted IPO’s but rather they can be established companies. In searching for trends in 2015, the list of stocks I have developed is a combination of small growth, IPOs and established names.

So let’s identify a few trends that should continue to grow in 2015 and then identify a few stocks within each of these groups that could provide some upside. One caveat: the overall health of the market must be positive in order for the majority of these investments to do well.

Six trends come to mind:

  • Cyber Security
  • Biotech
  • Digital Wallets (currency) & Mobile Payments
  • Drones & Unmanned Aircraft
  • Self Driving Cars (Future of driving)
  • Social & Web based brands

Cyber Security
$CYBR, $PANW, $CHKP, $CUDA, $QLYS, $RDWR

One of the obvious trends that should continue in 2015 is cyber security as breaches at major corporations around the world continue. Home Depot, Target, Staples, Michael’s and most recently Chick-Fil-A have all admitted to being “hacked”. And who can forget about the fiasco at Sony (whatever the real story may be). These companies and especially financial institutions must spend more money to protect their servers, clouds, data and integrity. This is precisely why I initiated a position in the cyber security sector in late 2014 and will continue to add to the position (at ideal risk / reward entries), using multiple stocks to diversify within this growing trend. One idea I have considered is building my own cyber security motif which would likely include several of the stocks listed above. Taking that idea further, a motif containing many of stocks listed in today’s overall blog post is a possibility as well.

2015_01-18_CyberSecurity_6mth

Biotech
$ILMN, $JUNO, $CELG, $REGN

The next trend that I like is biotech (a carry-over from 2014) and the big winner over the past several years has been Regeneron Pharmaceuticals. I have had the unique perspective of working with $REGN as they have expanded their headquarters in Tarrytown, NY; consulting for them (Real Estate & Construction) since January 2010 when the stock traded at $25 per share – it’s now trading above $400. Due to this professional relationship, I have mostly avoided talking about the stock on the blog and twitter.

With that said, I still like the broad sector. Illumina was a rock star in 2013 but traded mostly sideways in 2014. I liked the action in 2014 and view it as a long term flat-type base that looks poised to breakout above $200 per share. Sounds expensive, right? So did REGN at $100, $200 and $300 (after running from $25). $ILMN made a breakthrough in DNA sequencing and looks poised to continue that trend as well as expand elsewhere.

Next up is Juno Therapeutics, a biopharmaceutical company that engages in developing cell-based cancer immunotherapies. The company develops cell-based cancer immunotherapies based on its chimeric antigen receptor and T cell receptor technologies to genetically engineer T cells to recognize and kill cancer cells. Young IPO stocks are risky and typically like to build bases within the first year of trading but I am placing $JUNO on the list (use caution with first year IPOs). Cancer is not going away and the fight against it will continue to grow.

Both CELG and REGN can be added to a portfolio as their businesses continue to be cash cows.

2015_01-18_BioTech_6mth

Digital Payments (currency) & Mobile Wallets
$AAPL, $GOOG, $AMZN, $V, $MA

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Market Tops Take Time to Form

Market tops take time to form as the 2007-2008 graphic shows below. I developed the graphic due to several comments and inquiries following last week’s blog post titled “Calling a Market Top”.

Several stocktwits and twitter readers decided to comment without reading the entire blog post or did not read it at all. They were quick to judge and throw out “bear” connotations based on the title of the post rather than digest the content.

Today’s post further dives into the details and length of time the 2007-2008 market top actually took to form before fully breaking down (upwards of 10 full months). In contrast, the current market is barely a month into the first red flag, therefore, no one should be calling a definite market top – and I don’t believe anyone is, at least not around here.

2014_10-30_NHNL_Diff_NYSE_2007vs2014

The most interesting aspect of the 2007-2008 market top is the fact the market made new highs, after the first red flag. The NH-NL indicator also went back to positive territory after the initial negativity in July and August of 2007 (point #1 in the 2007-2008 side of the graphic).

New Highs averaged 129 per day while new lows averaged 252 per day in August 2007. The indictor turned more positive following the summer as New Highs averaged 135 per day while new lows averaged 59 per day in September and October 2007. This was a complete up-tick in activity. However, December’s average was 56 NH’s and 292 NL’s per day and it only deteriorated from there. The point being, the NH-NL ratio can start to look more positive as an overall market top is forming.

After the DJIA reached new highs in October 2007, the market took a big dive but made a higher low in late November 2007. However, the next red flag formed as the DJIA could not make higher highs and failed to recapture the 30-week MA (point #2). Another red flag was the fact the 30-week MA was starting to turn south (negative). Following these red flags, NL’s accelerated and the market made an even bigger drop into January 2008.

The final red flag took place between the months of April and June 2008, when the DJIA again failed to re-take the 30-week MA (as it was now trending downward) and fell well short of previous highs. New Highs within individual stocks were drying up and NL’s were starting to accumulate again. This was the final break in the overall market top formation. The market dropped an additional 50% from here.

Taking the analysis from above and incorporating it into today’s action, we can see that a market top (if one is beginning), is in its infancy and is likely to have several volatile swings up and down (both in terms of price and the NH-NL readings).

2014_10-30_NHNL_Diff_NYSE_2014-next1

A red flag is just a warning but it becomes a strong signal to take action when multiple warnings are registered. October 2014 is just a warning and I don’t know if it will lead to a more substantial correction but if it does, don’t be surprised to see higher highs before an ultimate breakdown.

If it doesn’t, well, jump back in and ride the trend higher because circumstances are constantly changing when trading the market. No one truly knows what will happen next (and if they do – they’ll be a lot richer than I am when it’s all said and done). The rest of us can only play the odds and manage risk.

My next post will focus on additional market tops so we can get a better feel for history, using charts.