Who will benefit when oil starts to fall?
(I'm sure oil will have its ups and downs, but personally I don't think these market analysts are taking into account that daily world production is close to max and India and China will continue to demand more oil. I doubt the USA requirements will ever drop off much if any and ONLY if we have lines at the gas pumps......am I FOS????)
Wednesday August 24, 10:24 am ET
By David Nassar
Commentary: Techs and brokers look to benefit
BOULDER, Colo. (MarketWatch) -- The oil market is starting to respond to every piece of news the market can muster -- a tell tale sign of deep speculation within the sector.
Not unlike the jittery low conviction speculators of the dot-com era, once traders begin to exit positions on light news and inelastic tops, the turn is usually not far away.
Are these jitters of recent weakness caused by anticipation to this week's U.S. petroleum inventory report? Downgraded storms in the Gulf, on again -- off again sabotage reports from Iraq, blow by blow updates on Iran's nuclear agenda, and even Venezuelan instability? No one knows for sure, but what is known from the market is the psychology of speculation.
Speculators are the most short-term participants in the market, and once this group feels the risk of driving prices higher outweighs any potential reward, fundamentals will dictate long-term price levels.
This includes airlines who are buying hourly futures contracts on fuel because they won't commit to long-term contracts that could be much lower. It is these kinds of fundamentals which tell the market that energy dependent industries are not willing to accept that the long-term trend in oil will be higher.
I don't claim to be an expert in international affairs or the politics of oil, and rest assured the equation is not simple -- likely too dynamic for any one opinion. What is more clear although is what history teaches us in the market. Or, as John Maynard Keynes stated:
"Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes a bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill done."
Many would agree that oil traders on the NYMEX are more driven by the game of speculation than actual geo-political and supply concerns. As bubbles go, trying to pick their top can be a very dangerous game, but seeking stocks less influenced by these bubbles can provide tremendous opportunity -- allowing room for these shares to rise rapidly once the market corrects itself.
As crude retraces on each report that hinders higher prices, we begin to sense the market better suggesting the fear premium priced into oil is "priced to perfection" -- meaning that in the absence of sensational news, oil's correction seems ever closer.
Certainly unfortunate and substantial news could move prices higher, but fear is factored into the market and this leaves room for the oil bears to step in.
If this weakness persists, then we stand to benefit nicely in the equity markets, namely the S&P 500 (Vancouver:SPX.V - News). Last week I noted that any breach of the 1219 level would warrant a move to cash. Cash is not a bearish position -- cash is a position of strength, anticipating when one will strike. My viewpoint on this remains. Cash at hand while this market defines itself is a good move, allowing one the ability to strike once the picture develops further. Therefore, which sectors look poised to move once the bulls reclaim lost ground is a fair question.
Two sectors looking primed for a move include, but are not limited to technology and financials. These are broad subjects, so let's look deeper and focus on Internet commerce for technology and the broker/dealers for financials.
The Dow Jones internet commerce sector has pulled back with the market and this is expected, but has pulled back into healthier levels than the S&P's (which is a display of relative strength). As of this writing on Tuesday afternoon, the index was showing strength at the 126.50 level and still well above its 50-day moving average which is the 123 level. I see this level as strong support beyond the obvious 50-day moving average. I also like this level because it approximates new higher ground for the year as well as maintaining a healthy pullback within a much more significant bullish trend. Therefore, if the broad market can find support, the Dow Jones Internet Commerce sector looks prone for a strong bounce -- with highlight stocks of particular interest.
They include: E-Trade (NYSE:ET - News) and Ameritrade (NasdaqNM:AMTD - News) which would also be fitted into the financial sector. These issues have shown resilience in spite of broad market weakness. As far as E-Trade, I would look as this duration a bit longer term (3 to 6 months) and expect protective stops to be set $15.12 with upside objectives to be north of $21. Ameritrade looks good until it breaches $19.20 and could easily see a target of $25 within the next 3 to 6 months or sooner.
Other issues shining bright within the group include Apollo Group (NasdaqNM:APOL - News) and Monster Worldwide (NasdaqNM:MNST - News), both of which look poised for higher ground. Keep in mind these two issues would be considered more risky, therefore Apollo is not a stock I would give much room, meaning that if it breaks the $73.30 level, I would call it quits. Otherwise, I consider $79 or better a reasonable price target. As for Monster, $31 or less takes me out of the trade with objectives set around $34 or better (new yearly highs).
These sectors and stocks represent an idea that makes sense if we see a weaker energy market, helping to drive cash back into the market, with technology being a large recipient. As cash moves back into the market, we can take advantage of this underappreciated economy and restore "investor confidence."
Many believe the recent bull market is a trap, but I don't.
I feel we have some near-term levels to overcome, but in the absence of any extreme events, we will see a higher confidence levels in the market supported by an already stronger economy. In other words, many consumers have benefited from rising real estate values (late trade in my opinion in terms of buying the home builders), job security, and disposable income. Yet, this money has yet to be put back into the market as a result of energy prices and shaken confidence.
Yes, some have taken advantage of the energy sector as a whole, but from the broad market perspective, the overall equity market psychology is timid due to energy prices. Many investors also haven't regained trust in stocks since the vicious bear market started in March 2000.
But once we remove the energy fears, I believe there is pent up confidence ready to finally emerge. The charts support this view as well, and as we like to say, the chart tells the story long before the headlines. I'm giving a perspective of what those headlines may look like as a result of the message the charts provide.
There are no certainties and this is why we use stops, but if we do lose, we lose small -- the high velocity rallies I am forecasting can erase small loses in the course of days. Therefore, don't expect perfect timing -- no one has that on a consistent basis. Instead, the larger picture is where our attention belongs, and while oil may not drop significantly Wednesday or next week, those willing to be in cash or even early in the market with stops, will catch the most exciting moves.
If I am wrong, and I very well could be, stops are there to ensure none of us "drink our own Kool-Aid."
Ultimately, trading is not about picking the tops and bottoms, it is about either having cash available when ready to strike or having anticipated the market by already being in it. The approach an individual takes is up to them and based on individual risk elasticity, but I certainly would prefer to be in cash or long the market over being short in the current environment.
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