Wednesday Energy Stock Review and SPY Thoughts
Mar 25, 2020 Trading Blog
First of all, I apologize for bailing on you guys on the Twitter account. As a daytrader (or any kind of trader really), the most valuable thing you can have is a clear and peaceful mind. People are scared and frustrated right now and those feeling are just being blasted all over social media. That’s probably a natural response, but none of us are forced to be a part of all that negativity. Sometimes it’s just healthy to unhook for awhile and get your mind right. I’ve met some great people on Twitter (thanks for the kind words) and I’ve enjoyed exchanging ideas with you guys, and at some point I’ll return, but right now the negative of Twitter simply outweighs the good. Things will get back to normal at some point, they always do.
I’ll still drop some thoughts here on my site a few times a week and I’ll post the link on Twitter when I do. My thoughts are kind of scattered in this article, it was a long trading day and I’m beat, but the simple process of writing it all down is somehow therapeutic and relaxing to me, and the organization is definitely helpful.
Overall Market SPY
This bounce has been incredible, but the big question remains, is it real and have we made a bottom? My opinion is no. I think someone is truly gaming the system right now for some very quick and very large gains. They have pinned the shorts in a squeeze and at the same time enticed the BTD crowd into huge FOMO. I think we eventually give that 185-200 level in the SPY a look and I think it could be sooner than many think. This bounce has been nice, but you have to step back and look at all the action required to produce it. How many times has the FED stepped in? I’ve lost count. Rates at 0%. Monstrous overnight repo. Trillions in QE Infinity. A congressional stimulus package of 2 Trillion (or was it $6 trillion?). Was this 40 point SPY bounce really that impressive given all that liquidity combined with how oversold we were?
Technically, I have been watching 256, and the market stopped close to that mark today. Bigger picture, I discussed last week how I thought the market likely bounces to that 286 level. I’m starting to think I was too high on that one. Most of the other people that I talk to say watch 270. I think the true answer is probably somewhere in between 256 and 270. Also, keep an eye on LQD, it may run into some big resistance soon. It’s at 123 and has retraced about half the move down. If it starts down again, the SPY probably follows.
Edit: I did most of my writing in the last 30 minutes before that end of day collapse down to 246. I’m not sure what caused that, but it’s not a great sign of things to come tomorrow. Someone wanted out in an urgent way and the volume was excessive. There really wasn’t any sense in dumping like that for a $10 loss, especially since they could have done it earlier in the day at a much better price. Feels like something is coming, and it’s probably not good. Keep an eye on the news.
I think the market may have several problems with what has transpired. First of all, and most importantly, the coronavirus is still out there. Most of us traders are so involved in our markets that we forget about the real world. As I sit here and watch this historic bounce, it feels like coronavirus has completely vanished into thin air. It hasn’t. Most of us aren’t going anywhere for weeks, maybe months. We have yet to even get a glimpse of the hit this economy is going to take. There seem to be many that think this thing just snaps right back, but there’s a real possibility that the population may be quarantined longer than expected. Also, when the quarantines are finally lifted, will the public revert to pre-virus form? Has the media scared them so severely that they are psychologically damaged for a few months, maybe longer? I think many are expecting consumer spending to bounce right back, but I also think that many people are spending their spare money and savings right now. Will they have any money to spend when this is over, especially the out of work people? How do business owners get back on their feet now that they are so far behind? This doesn’t just snap right back and I think the market might not recognize that yet, which is why I think there is another leg down.
Next, what if it doesn’t get any better and this virus doesn’t go away or the consumer spending doesn’t come back? What does the FED have left? Whatever they could do will mean little in the future. They just gave the market a massive dose of heroin, and giving the market an aspirin later isn’t going to satisfy the next drug fix. If things do start to bounce back, then the FED is likely done and may even have to start tightening to siphon some of that emergency liquidity back out of the system. They can’t lower rates, so it’s only higher from here, and the market normally doesn’t do so well as rates increase.
So let’s say the virus does pass at some point, has this 8 week market correction really corrected any structural problems in the overall system? Did it fix anything in the energy sector? We have bear markets for a reason, they force inefficient businesses to either change or vanish. Those businesses were dead weight and a drag on the economy and the bear market cures that. Was the little correction we had enough to do that this time? Probably not. Those dead weight losers are still in the system. The economy still has cracks and if the market goes higher we are once again quickly overvalued.
One curious question that I have is what really happened here? Did we get scammed? Was the virus just an excuse to issue stimulus and bailouts to a sick economy? Have those problems been fixed? Probably not. It will be interesting to see if the virus magically disappears now that everyone has their money and the system is once again full of rocket fuel liquidity. It really feels like the FED used this opportunity to cover their butts and paper over a bunch of prior mistakes. Keep on blowing the next bubble, right?
You also have to really consider if any stock changed hands in this correction. Did anyone really sell those 401k’s? This whole event happened so quickly that those holders probably haven’t even got their first statement yet. But one thing that did happen was fear. The seed has been planted in many people that they could lose it all, especially those guys getting close to retirement. You think this recent scare won’t wake them up to the need that they should start trimming things back now? They need to start locking those gains in as they get close to retirement, and that isn’t going to help the future market. I’m guessing that there are many scared people who will sell this market as SPY 300 approaches, and definitely if we get back anywhere near all time highs. There’s a real wakeup call that happens when you lose 35% of your net worth in a few weeks. It will be interesting to see if those sellers will balance out the plentiful liquidity we just injected.
Energy XLE
As for oil, it’s been a nice bounce in energy stocks, but the reality is we are still sitting with $25 oil. We still have bankruptcies coming. We still have a price war with Russia and OPEC. We still have demand destruction and we don’t know how much more severe that will get. We still have huge problems in energy. There’s a good chance that much of the past demand doesn’t come back. I know my wife’s job has got along just fine with Zoom teleconferencing and I wouldn’t be surprise to see them move from travel to online conference, especially given the new need to trim expenses because of all the money lost lately. Same for education. My daughter isn’t going back to school until September. That’s MILLIONS of cars still sitting in the driveway that would be on their way to and from school every day. And many colleges may make a permanent switch after this trial run of online learning.
The question for this latest move in energy is, “Who is the buyer down here?”. What timeframe buyer are we looking at in this sub-30 XLE level? Is it a buyer that will lock all this supply up for five years? If it is, what happens to price when this buyer stops buying? Do we fall right back down to XLE 23 when a huge buyer like this stops buying? Or has this been a bounce created by fast money looking for a quick hit? If so, then what happens when this fast money moves on? I started last week’s article off discussing whether or not you really want to buy this bottom, even if you were sure it was the bottom. At this point, I don’t know who is buying here or if this is even a bottom. I suspect that we haven’t seen the lows yet. While the bounce is nice, energy still hasn’t solved its underlying structural problems.
I’m looking for a pullback in XLE either after lunch Thursday or on Friday morning. That pullback will be a huge clue about what might happen over the next week or two. If the pullback can hold that 26 level, then we have a shot at more upside, possibly the 34 level. If 26 doesn’t hold, then I’d guess we are looking at another leg down. Remember, 26.20 was last week’s VWAP, so it will remain important for the rest of the week.
As for individual stocks, XOM and CVX saved the day, but has their bounce played out? CVX bounced from 52 to 73 and it could easily pull back half that run. Same for XOM. One thing that I am noticing is that some of the E&P’s aren’t bouncing well. It’s a good chance to get a look at which may be in trouble. If you want to buy an individual E&P and it didn’t bounce in this two day move, then I’d think twice. Stick with the stocks that have shown positive relative strength.
Keep an eye on the refining segment, it seems to hold the XLE’s fate. Today the refiners bounced huge, as did XOM and CVX which have refining portions. Finished product demand is going to be a problem. The entire sector will likely only go as far as refiners go, so watch MPC, VLO, PSX, HFC, PBF and DK.
Anyway, just wanted to drop some thoughts in on a busy week. Whenever I post on the site, I’ll put a link up on Twitter. Thanks to everyone for the kind words on Twitter, like I said, I’ll be back at some point, but I just can’t deal with the negativity out there right now. It’s going to be a wild market for a few more weeks, so be careful out there and stay rested, both physically and mentally.