Oil and Gas Equities Weekly Review, March 4
Mar 4, 2018 Trading Blog
In last week’s review, I posted a list of things that could possibly turn the sector positive and it appears that some of those are indeed taking hold. I was bearish going into this past week, but was on the lookout for things possibly moving to a more neutral or bullish stance. Well, I think we definitely got that and it’s probably time to move away from the bearish bias. I’m not moving to the bullish camp yet, but more toward a neutral trading range type camp. I will likely NOT be looking to take any shorts this week, unless things somehow change in a big way back to a negative condition. Conditions change and you have to adjust your bias to stay consistent with market conditions, and your account will truly suffer if you don’t.
I think the worst part of the week was that I was in the process of altering my bias but I just didn’t do it fast enough. Just after the opening bell on Friday, I sensed a change in the XOP and even put on a long trade, but I got stopped out of it and then never could engage again for the rest of the morning. By lunchtime, I had made up my mind that I wasn’t going to chase, which was probably a mistake to give up on the market so soon. The only good thing I can say was at least I wasn’t short. I thought this was possibly a short covering event, but the longer the buying went on, the more clear that short covering probably wasn’t the answer to this move up. It simply seemed as if there just weren’t any sellers around and the buyers had to pay up to get what they wanted. Had this been short covering, price would have dropped quickly when the buying stopped, and that just didn’t happen.
Having said all that, I’m still not sure we are out of trouble yet, but things are looking better. I won’t completely abandon the bearish bias until the XOP can convincingly break above the 35.50 level. We closed last week at 34.21. If we move back below 33, then the bearish bias will definitely be on again. For the most part, I guess you could say I’m neutral this week and looking for a trading range between 33 and 35.50.
Most of the E&P’s seem to be retesting their early February lows and have shown signs of actually holding those lows. The real tell for me was that these stocks showed strong relative strength while the SPY was having a terrible week. With many of the E&P’s sitting at the early February lows and the SPY showing strong downward momentum, they could have easily cracked and made new lows, but they didn’t. Someone was under the market buying energy. There is a possibility that money was rotating from tech to energy, or possibly from some other sector. Where the money is coming from really isn’t clear. This tech to energy rotation was very common back in late November and could be returning. The only problem with that rotation was that when tech finally got its footing, energy quickly got tossed aside.
Scanning through the energy list, most of the E&P’s are still well below their 50 day moving averages, and a good number are still well below their 200 ma’s. The 50 ma for the XOP sits at 35.31 and the 200 ma sits at 33.69, so we closed Friday at 34.14 right between the 50 and 200 ma. There are a few strong E&P’s who jumped specifically on good earnings reports like RSPP, FANG, NBL, WPX and WLL, but for the most part there aren’t any others trading above the 50 ma. If the sector is going to heal, we need to see a majority of the E&P’s getting back above those 50ma’s.
On the fundamental side, the Wednesday EIA number was a 3 million build, which didn’t stop the buying and that is good to see. I think one thing that helped was the production number seeming to level out a bit from the last few weeks of increases. Production might not be growing as consistently as some expected. The spurt of growth from a couple of weeks ago could have been an outlier and not a true reflection of the future production growth rate. Demand seems to still be strong. One thing that did get some attention was the trade war issue resulting from the new tariffs enacted. There could possibly be some positive reflection for oil prices due to the extra costs that those tariffs would impose on the oil and gas industry. The thinking could possibly be that higher costs could curtail drilling, which in turn decreases production and causes higher oil prices. I’m not sure if that logic would actually hold, but it could be a theory supporting higher oil prices.
For the upcoming week, the most important thing for me is going to be the action in the SPY. That Friday low of 264.82 has to hold. If it doesn’t, the market is likely headed at least to the 200 ma at 255.90 and probably to the February lows at 252.92. I’m still of the opinion that it makes a low in the 245 range. The bounce on Friday was nice, but if it doesn’t hold, all those buyers will turn right around and puke that stock right back on the market. It’s the same story for the XOP, that 32.81 Friday low needs to hold for it to make a permanent turn.
The decline in the dollar on Thursday and Friday was also a big contributor to the increase in oil prices. If oil is going to continue up, then the dollar probably has to make another run toward the early February lows. That dollar weakness also showed in a couple of up days for GLD. Commodities seem to be more sensitive than normal lately to the dollar, so keep an eye on that as a leading indicator for commodity stocks. Also, keep an eye on rates. I watch the TLT and Ten Year Yield. The TLT actually rose a tiny amount last week, which in turn produced a bit lower rate. If rates could just stay level this coming week, that could provide some stability and encourage more risk on type trades.
Keep it safe out there this week and stick to your plan. Be willing to adjust according to the facts and don’t get stuck in a single bias. Good luck.