Weekly Energy Equities Review and Market Outlook for March 30 -April 3
Mar 28, 2020 Trading Blog
Hope you guys all had a great trading week. It was peaceful and calm here. Getting off social media was a great decision. It’s so relieving to just turn off the outside world and spend time doing things I enjoy. If any of you guys are stressing about the current state of the world, or just tired of the quarantined masses venting and raging on social media, then just unhook from it. I promise you won’t miss anything and your brain (and your family) will thank you.
Overall Market SPY
If you just look at the price action from the Monday open until the Friday close, it was an incredibly bullish week. The problem arises when you pull back and look at the context of the bigger picture. It’s been a long trend down and the market was due for a big bounce, which we definitely got. I was expecting this market to bounce to the 286 area, but I don’t think it’s going to make it that high. I’ve seen others calling for the bounce to top out at 270. There’s always a chance that this run keeps going early next week, so maybe the 270-286 area isn’t out of reach. SPY hit a high of 262.80 and closed at 253.42 on Friday. The FED was active and Congress also helped out with a $2 Trillion stimulus package. It was QE Infinity and the market loved it. My concern is that we were hugely oversold and really only got a ~45 point bounce so far. All the things that the FED and Congress did and we only got a 45 point bounce? It really should have been more.
The big questions for next week will be how far does this bounce continue and then how big will the pullback be? The worst case scenario would be a weekend of heavy deaths and terror from the media. In that case, it’s possible that this week’s high was the top of the bounce. If the news is bad enough, I could see us gapping down Sunday night, attempting a rally Monday which fails and then roll over for a decline the rest of the week. Hopefully we don’t get that worst case. If the weekend is fairly quiet and we get more stimulus talk or FED comments, I could see SPY opening in the 260 range and making a run at 270 on Monday/Tuesday. I think that’s probably the best case. Once the bulls finally exhaust their buying, the shorts all cover and everyone’s FOMO is satisfied, we then get the pullback.
I’m looking at 237 on the pullback. I think a big decision will have to be made there. If 237 can hold, then I think we can bounce again and keep price in the 240-260 range for the rest of the week in a consolidation. If 237 fails early in the week, then I think we probably head for the SPY 185-200 area. I’d like to see us test that 185-200 area. I think it would wash out a lot of weak traders and give the market a solid base to start its next run. On a personal basis, I’ve only put in about 25% of the cash that has been sitting in my wife’s 401k. I got an average price on that quarter of about 232. I absolutely hate the end of day pricing at Fidelity. If we start another downtrend, I might be forced to add another quarter in the 227 range, a quarter in the 205 range and the last quarter on the break under 200. That’s the plan for now, but could definitely change if news becomes more negative or if the market increases its downward momentum. I think if you have long term cash available, you have to start scaling in on the next pullback. This market could always pull back further than you think, but the safe play is to try and get the money in with an average in that 200-220 range. The real danger is to be too conservative which could cause you to miss this entire pullback. These chances don’t come along often, so you have to capitalize. If you are younger, don’t be too concerned about price, just take the 220 area. I’m 52, so I need to get as much of the pullback as I can because I don’t have as much time to let the money grow.
The biggest event this week was the 3.2 million unemployment claims number. SPY was trading around 241 premarket and climbed straight to 257 after the number was released, which was surprising. I completely expected the market to tank on that number. This tells me that many were probably expecting a much worse number. I saw a few mentions of Trump wanting some of the states to hold back their numbers, so I get the feeling that the next number is probably going to be just as bad. I definitely won’t be holding a position on the next jobs number.
The virus talk wasn’t really high on the markets list of things to worry about this week, but I think that changes next week and we move from FED and Stimulus talk to virus economic damage talk. The total number of deaths is still small, around 2000 I think. That sounds like a huge amount to the CNN/FOX crowd, but if you really compare that to the number of deaths from other causes, or even the number of deaths from the regular flu, it’s actually quite small. As we near the peak, the number will grow, but in the end it’s going to be a much smaller number than almost anyone predicted. The more concerning thing is that we will start hearing more talk about the economic damage, which will likely lead to earnings revisions, personal bankruptcies and incredibly high unemployment. At least we have finally figured out that we need to get the country open again soon before we destroy ourselves. I think the economic fallout is going to be so much worse than anyone expects and this will ultimately be the thing that pushes the market to lower levels. All this stimulus and QE is only temporary fuel and it will run out.
The real problem is going to be getting the consumer to start spending again. Media has truly damaged that future spending with their sensationalism and how they have presented this whole event. Someone please inform the major news channels that there is more to the world than New York City. You can’t just go to the poorest and worst hospital in Queens and make the public think that’s a true reflection of the American situation. It reminds me of a funny story. I used to live in Mobile, Alabama and we had this one street that flooded every time it rained. The news would always go to that street for their “flood horror” pic. It became a joke. Going to a broken down, ill-equipped, overcrowded inner city hospital that mainly serves indigent patients with poor health isn’t a true reflection of what’s going on in the rest of the country. While I feel for NYC, the rest of the country is holding up very well, especially the rural states where there might be less than 100 cases in each. As I’ve said before, the media has hyped this virus so horribly and they have truly caused psychological damage to the public, and nobody will stop it. The market will be focusing more and more on that damage to the public and their spending habits this week, especially the unemployment numbers. I’ve said this from the beginning, the economic damage will be ten times worse than the actual virus damage. We should have managed that better in the beginning, but it’s too late now.
There’s another thing that could take this market down in the next couple of weeks that many aren’t considering. The economic damage could be so severe that we have to request another Congressional stimulus package. If the government tries to go back and do another package, I think the market will implode. You can do one, but if the market senses that this is going to become a habit, it will not be happy. The public will also become outraged if the government just keeps giving more and more money to bailouts, especially if that second package doesn’t send more money directly to the people. If we see more businesses asking for bailout money, or if there’s any improper use of that money, things could get ugly. There’s also the risk that we could see some businesses just outright fail and close their doors. Sometimes you just can’t save everyone, nor should you. If you see any mention of a second package, get cautious.
One last thing, what would happen if there was any type of terrorist event right now? Or a geopolitical war type event? Or some other black swan? We are stretched to the limit right now and you have to keep in mind that more than one swan can appear at the same time. Keep an eye on any new or out of the ordinary events. They might not get immediate play since the news is so focused on the virus, but they could appear and you want to notice them early. Our economy can only handle so much stress at one time before it breaks. Always protect your money and size your positions to be able to handle any market move. If you start to see any other strange events, be cautious.
Energy XLE
The market is missing some big clues in energy. Everyone is approaching mass panic and pessimism for shale. Nobody thinks any of the oil companies have any chance in hell of surviving. Oil prices are moving into the teens. But what did energy stocks do this week? They went up. We are starting to see that positive divergence that signals a possible bottom on the horizon. As oil moved back down near 20 on Friday, the XLE finished above 28, up from the 23 lows on Monday. When oil finished near the lows, the energy stocks didn’t. That’s a positive sign. A few weeks ago I posted a warning on confirmation bias. That bias is starting to creep into many traders’ thoughts. Everyone is short right now and everyone is looking for reasons to justify those shorts. Those traders are ignoring facts that are in opposition to their short positions, and that’s dangerous. When traders suffer from confirmation bias, they can miss the turn. I’m not saying the turn is immediately upon us, but I really think there are some traders who will get themselves trapped because they aren’t noticing the information that is opposing their positions right now. If you ignore that positive divergence, you open yourself up to a big loss, either getting caught in a short squeeze or missing a once in a lifetime opportunity on the long side.
As I’ve been saying for a couple of weeks, storage is becoming a problem. Putin knows it’s becoming a problem. He wants it to become a problem. I think the government was VERY smart to recently decide against filling the SPR. That SPR is your safety valve and it’s not meant to be used as a profit generator. They are leaving this storage space for a reason. They know that if all the storage gets full, price crashes and shale has to turn out the lights. If shale can’t store it and can’t sell it, then the only option is to leave it in the ground. Also, if we do reach that point and SPR is the only storage left, they can probably fill that last remaining space in the $10-15 range. Putin is playing the long game here and his power will reach a peak when storage is full and we hit maximum pain.
There has been a lot of talk about a three way deal between OPEC, Russia and the US, but I don’t ever see this materializing. It’s really just a bunch of hype coming from our government in an attempt to talk prices back up, and that’s not going to work. I also haven’t seen anyone point out the fact that it’s also illegal. There’s a reason that we aren’t already in OPEC, and that’s because our laws forbid it. I’m not sure how they would even get around the cartel allegations if they worked together. OPEC and Russia have other reasons for their price war. One of them is destroying shale. All these pleas and begging Saudi to save shale aren’t going to be answered. Their plan is working perfectly right now and I don’t see any reason that they would just abandon that plan when they are so close to success. They knew they were going to incur some pain to accomplish their goal and we are being foolish if we think they are anywhere near their pain threshold. It’s the US that’s feeling the pain. If you are thinking about buying energy stocks because you think there is going to be some surprise deal to save the day, then just don’t.
But given the fact that Russia and OPEC are still fighting against each other, is that really a bad thing for the US in the long run? Maybe not. Do we really want Saudi and Russia joining forces against us again in the future? Might it be to our advantage if they weren’t working together? I think many people may be jumping to conclusions about this OPEC/Russia separation being bad for the United States. Maybe this isn’t bad. Maybe this opens up freedom for the United States and opens the market to a more capitalist based approach. America is pretty good at capitalism. Maybe it removes some roadblocks to markets and market share. While the cuts would have been nice, the US no longer has to deal with the double-team of Saudi/Russia. There’s always a silver lining in every storm cloud.
Back to the XLE, things were actually pretty good this week. We finally hit a temporary bottom at 23.15 on Monday and then gapped up huge on Tuesday with the rest of the market. Price trended up sharply Tuesday, Wednesday and Thursday, but Friday was the more encouraging day. The XLE could have collapsed as oil sunk back near 20, but price held 28 nicely. I posted on Wednesday that I was looking for a pullback to 26, but we stopped well short of that level and that is an encouraging sign. VWAP for this past week was ~27.50 and that will be an important point this week. A 50% retracement of last week’s run would be ~27.15, while a 61.8% retracement would put us exactly at that 26.20 VWAP that I watched all week.
So where does the XLE go from here? I think we may be looking at a Wyckoff accumulation developing. I mentioned this a couple weeks ago with XOP, but the XLE is now starting to show a similar pattern. We probably completed the automatic rally this week off of that selling climax ~23. The AR point for the coming range is 31. I could see price rotating between 23 and 31 for a few months, with the occasional exploration outside the range. That would put fair value of the range between 26-27. Watch to see if that level starts acting as a magnet for price. We had three reactions to that level on the way up and I would expect that we may have a couple of reactions to it as we head back down. Also, as I wrote last week, you have to decide if you think this is the bottom and also how you plan on trading it. If this is the bottom, are you willing to hold your position for a couple of months until this accumulation pattern completes? Are you going to be willing to hold your position as we test the lower boundary at 23? What if we form a spring that goes as low as 20, are you sized correctly to withstand that drawdown?
The key to XLE direction is the behavior of the oil majors, XOM and CVX (Remember, these two stocks make up about 50% of the XLE). I’d also keep a close eye on BP, RDSA, TOT, EQNR, PBR and SU. I’m still concerned that a dividend cut is coming which could send the XLE down 20% within a couple days of any cut. Maybe the market will respond to the cut better than I think, but any dividend cut will cause a certain group of investors to sell at any price, especially if the SPY takes another tumble. That event would be the entry signal for me into XOM and CVX. You could also extend that thinking to the larger E&P’s with dividends.
Another important factor for the XLE is the refining sector. The overall sector is being controlled by the narrow refining segment right now. MPC, VLO, PSX, HFC, PBF and DK have had huge moves, both up and down. Also notice that the refining operations of XOM and CVX caused those majors to move with the refiners this past week. Demand for products is getting crushed with this lockdown across the country. Nobody is traveling and the stockpile of gasoline and distillates will continue to grow. The spreads for the refiners are getting crushed and this will likely show in terrible earnings for the quarter. See if the refiners can keep bouncing this coming week. If they fail, the whole sector likely follows.
Playing individual names was a good approach this week, but I’m leaning away from individual stock plays this coming week. If the sector establishes a defined trend early in the week, I might step back into a few names, but I think the volatility will just be too much this week to do so. On the long side, I’m looking at possibly getting in EOG near 31, COP 26.50, HES 31, CXO 38, HAL 5.50, PE 4.75, PXD 59, SLB 13, MPC 19 and VLO 39. I’m not committed to this list because much will depend on the SPY and its downward momentum, as well as the price of oil. This is just my rough plan for longs if the sector seems to be bottoming. I’m not interested in playing anything short this week.
Trading Plan for the Week – Honestly, I don’t yet have much of a plan for this week. Any plan I make here on a Saturday morning is probably going to get blown out of the water on the Sunday night open, so I’m waiting until Sunday night to formulate any trade for Monday. But having said that, I’d like to try and take XLE long on a pullback. If you put the XLE up on a 15 minute chart, you can make out a head and shoulders type top forming beginning late Wednesday afternoon (left shoulder), Thursday (head) and Friday (several failed attempts at a right shoulder). The neckline on that pattern is 28. Ideally, I’d like to see price breakdown under 28 and test that area underneath and then reclaim 28 for an entry long. But again, it all depends on that Sunday night open in oil and the SPY.
As has been the case so many times over the last few months, IWM is again moving in sync with energy. The small caps and energy are very sensitive to the consumer (and their employment). If nobody is working or shopping, then they aren’t using gas to get there either. Most of my daytrading has shifted to IWM and it is showing almost the exact same pattern as XLE. There is a neckline sitting around 111 that needs to hold on the Monday open. There is likely a daytrade long on the test and reclaim of that level. If 111 doesn’t hold, then there is another chance at 108.50 to try another intraday long trade. If 108.50 doesn’t hold, then I’m probably done trading on the long side for the day and will shift to the short side to try and ride it from 108 to 101.
It should be another long and busy week and as I said in the open, sometimes the mind needs a rest. If you feel stressed, then just unhook for awhile. Twitter will still be there when all this craziness passes. Hope everyone enjoys the rest of the weekend. It’s going to be 76 degrees here tomorrow. I’ve got a brutal Monopoly game scheduled with the kid and then wine time in the sun with my wife, that’s a good day. Good luck this week and be safe out there.