October 16th, 2012

KOL and UNG: the First Chapter

I’m not breaking any new headlines here but the Fed has flooded the economy with a huge amount of liquidity.  To this point about the only thing I focused on with regard to all that money sloshing around is to wonder when it might come in to the stock market.  Consequently, I missed the surprising new boom that’s emerged in housing and most related industries like lumber,construction equipment and tools and home related retail.

But sooner or later all that newly created money should begin to show up in commodity prices (other than precious metals), inflation statistics and, finally, in interest rates.  We may have gotten a peek at that future this morning when the government reported that industrial production rose 0.4% in September while capacity utilization inched ahead from 78.0% to 78.3% and copper rose 0.5% on the commodity exchange.  It may be time to take a look at a couple commodity ETFs.

  • UNG (Natural Gas): I swore off of natural gas having been burned by it (no pun intended) several times over the past few years as I bought mistakenly believing that the commodity just couldn’t drop any further in price only to have been proven wrong.  Perhaps it might be one of the instances again:What a huge destruction of value!  If you had put $1000 into UNG when it first became available and held on for the duration, you would have been left with a measly $54.80.  There’s not much hope in recouping all that money any time soon but, if you want to put $1000 in UNG today, you could have a fairly good chance of perhaps doubling it.  For the first time in many years, UNG is in the process of forming a reversal bottom pattern.  The 50-dma has crossed above both the 100- and 200-dma’s and the 100-dma has also crossed above the 200-dma.  Volume has picked up significantly due to many bottom fishers who are now betting on that bottom taking place.  There still are many skeptics out there so if a reversal is truly in the making then it will probably go through many stages and stretch out for years.  Along the way, there will be several constructive trading opportunities …. a long-term buy-and-hold approach could be frustrating.
  • KOL (coal): Coal is the bad boy of the energy complex but, with the possibility of a Romney victory, may gain some new found respect in the effort to become energy independent.Like the case of UNG, KOL is in the early phases of a clear-cut reversal pattern.  The upside opportunities may not be as significant as UNG (because the previous decline wasn’t as severe) but, as a more mature industry, they may be more certain.

Of course,one can play the natural gas and coal producers instead of the ETFs and there always are the precious metals (GLD, SLV, GDX) and their producers.  Clearly, this is a long-term unfolding story that we’ll continue to follow.

August 29th, 2012

Every Trading Range Is Not a Reversal Top

One of the “Talking Heads” regularly trotted out by CNBC to share his wisdom is Dennis Gartman.  He usually makes some sort of esoteric, useless recommendation like “I’m not buying gold in Dollars but am buying it in [Australian Dollars, Indian Rupee, Thai Baht, Japanese Yen or some other currency which is equally meaningless to his US audience but meant to make him sound like a true authority.  Instead, I just chuckle at his pomposity.

In any event, he’s been taking a different tack recently calling for a market decline.  One June 4, Gartman announced the beginning of a new Bear Market:

“The weak U.S. jobs report for May and a deterioration in the U.S. economy will lead the U.S. Federal Reserve to announce another round of quantitative easing as early as this month….could come as early as the Fed’s next meeting on June 19-20, or at the following meeting on July 31-Aug. 1. The central bank will want to ease as “far ahead” of the U.S. presidential election in November as possible, so it doesn’t come off as being “politically amenable” to the current administration….”I’d much rather be optimistic than pessimistic, but I think the European governments have forced me into being somewhat pessimistic,….But will [QE3] have a bullish effect on the stock market? Probably not. The fact that they need to do it alone is very disturbing.”

On June 4, the S&P 500 was 1278.18, or 10.35% lower than today’s close.  Not having changed his mind (nor learned his lesson), Gartman went back on the CNBC air to reiterate his nervousness:

“We saw divergences between the transports and the Dow Industrials — old-style, Dow-type theory things — a lot of people having been bullish.  Now I’m just neutral.  I’m flat, and I’m nervous.”

So what’s causing all this angst for those who are supposed to be cool and collected?  I’d say it’s their superimposing what they see in the global macro-economic environment onto the market’s narrow range.  A friend of mine used to say that “if the only tool you have is a hammer then everything looks like a nail”.  In a similar paraphrasing vein, “if you’re basically a pessimist then every trading range looks like a reversal top.”

The market must be offering a lot of fodder for pessimist these days because, if you are so inclined, you can envision a “double-top” emerging from the huge trading range the market’s been stuck in since March:

Yes, if I squint hard enough I can can perhaps begin seeing the possibility of an emerging double-top.  But the market is far from clearly completing the left shoulder.  The May trough is the single pivot “defining” the lower boundary of the horizontal channel (two, if you consider the pivot point at the November 2011 peak to be a part of this emerging pattern) and that is a long way from a fully formed congestion pattern.

I don’t deny that there may be a correction around the corner but it’s a long way to a fully formed reversal top.  I’m also cautious but not so worried as to be ready to start dismantling my portfolio of excellent stocks.  One of the reasons I’m not ready yet to see the market’s reversal top is that, at the individual stock level, I see too on my watchlist as if they’re ready to finally break above key resistance levels.  One typical example of many is SRCL, one a leading momentum stock:

So let’s not walk around with a hammer breaking everything because all you see are nails.  Let’s not allow our basic caution mistake every trading range as a reversal top.