Stock Exchange: Are You Trading The Energy Sell-Off?
The Stock Exchange is all about trading. Each week we do the following:
- Discuss an important issue for traders;
- highlight several technical trading methods, including current ideas;
- feature advice from top traders and writers; and,
- provide a few (minority) reactions from fundamental analysts.
We also have some fun. We welcome comments, links, and ideas to help us improve this resource for traders. If you have some ideas, please join in!
Our previous Stock Exchange asked the question: How Do You Handle A Losing Streak? We reviewed how common psychological reactions can derail your long-term trading success, and how understanding these reactions can ultimately help get you back on track. If you missed it, a glance at your news feed will show that the key points remain relevant.
This Week: Are You Trading The Energy Sell-Off?
Whether you call it an energy sell-off or a momentum-based technology stock melt-up, the divergence is significant. Here is a look at the year-to-date performance of energy stocks (XLE) and the tech-heavy Nasdaq (QQQ) versus the S&P 500 (SPY).
Arguably, energy stocks have sold-off because the rally in oil prices finally slowed last month, and the new Fed Chair, Jerome Powell, announced he wouldn’t let market volatility slow the rate of interest rate hikes (energy companies tend to be capital intensive business and are thereby affected significantly by increases in borrowing costs). And most recently, the Federal Energy Regulatory Commission (“FERC”) on Thursday delivered a blow to energy MLPs by announcing they’re disallowing certain tax cost recoveries. And at the same time as the energy sell-off, technology stocks continue to sail higher, more than recovering from February’s market wide sell-off and now sitting near fresh all-time highs.
And while this trend has intensified this year, it’s been building at least since oil prices dove in the second half of 2014, and as far back as the fed’s ultra-accommodative monetary policies began following the 2009 financial crisis.
One way to trade this trend has been following the momentum. For example, as we’ll see later in this report, our momentum-based trading models continue to put up strong results, while also complementing our mean reversion trades.
Also worth considering, Michael Boyd shares a time-honored trading strategy to hedge against the momentum rally in this article: Tech Rally Exhausted.
Aside from momentum, shorter-term energy market volatility is creating some attractive trading opportunities, as well. For example, we share one of our recent energy sector trades (Whiting Petroleum (WLL)) later in this report.
Per reader feedback, we’re continuing to share the performance of our trading models.
And as alluded to earlier, we find that blending a trend-following / momentum model (Athena) with a mean reversion / dip-buying model (Holmes) provides two strategies, effective in their own right, that are not correlated with each other or with the overall market. By combining the two, we can get more diversity, lower risk, and a smoother string of returns.
And for these reasons, I am changing the “Trade with Jeff” offer at Seeking Alpha to include a 50-50 split between Holmes and Athena. Current participants have already agreed to this. Since our costs on Athena are lower, we have also lowered the fees for the combination.
If you have been thinking about giving it a try, click through at the bottom of this post for more information. Also, readers are invited to write to main at newarc dot com for our free, brief description of how we created the Stock Exchange models.
Expert Picks From The Models:
This week’s Stock Exchange is being edited by Blue Harbinger; (Blue Harbinger is a source for independent investment ideas).
Road Runner: I bought energy sector stock, Whiting Petroleum (WLL) on March 8th. Are you familiar with this name?
Blue Harbinger: Yes, I am familiar with Whiting Petroleum. It’s an oil and gas exploration company, primarily in the Rocky Mountain region. And like a lot of oil and gas companies, the shares tanked in the second half of 2014. They fell from over $370, and they were under $16 in October. However, the share price has shown some signs of life in recent months as energy prices perked back up. Why do you like this stock, Road Runner?
RR: I like to buy stocks that are at the bottom of a rising channel. And based on the following chart, you can see why I like Whiting.
BH: Interesting pick, Road Runner. Even though Whiting is not profitable, the company seems to be moving in the right direction. For example, the company’s last earnings announcement revealed a smaller loss than expected, and revenues were also higher than expected. Whiting is steadily moving back towards profits, eventually. Here is a look at the Fast Graph.
RR: I like that information, but keep in mind that my typical holding period is only about 4-weeks, so I’ll be out of this trade before the next earnings announcement. However, I do like that this company is moving in the right direction both fundamentally and technically.
BH: Great. Thanks, Road Runner—I’ll check back in with you on this one in about 4-weeks. How about you, Athena—what have you got for us this week.
Athena: I bought Tenet Healthcare (THC) on March 12th. Unlike Road Runner, I don’t wait for a dip (even if it is a dip within a rising channel), I like momentum. And as you can see from the following chart, Tenet has been posting strong gains recently—it’s well above its 50-day and 200-day moving averages.
BH: I do see the strong price momentum you are talking about, Athena. But this is a stock that sold-off significantly since 2015, and it posted negative net income the last 3-years in a row. This company operates hospitals, and they’re dealing with the same Medicaid cuts and challenges that everyone else in the industry is dealing with. Here is a look at Tenet’s Fast Graph.
Athena: That’s nice, but my typical holding period is only about 17-weeks. And Tenet announced very positive earnings at the end of last month. Specifically, even though GAAP EPS was negative, non-GAAP was positive and above expectations. Revenue was also above expectations, and this stock has some serious momentum on its side.
BH: Okay, Athena. Clearly you’ve been putting up strong performance numbers over the last year and in recent months (as shown in our earlier performance table). Apparently, you’ve been able to take advantage of the momentum trades that have been driving many portions of the market higher.
Athena: Thanks. I also use price targets and stops for risk control purposes. Anyway, how about you Holmes—do you have any trades to share with us.
Holmes: Yes, I do. And just to be upfront, my style is totally different than yours. I am NOT a momentum trader, and am a dip-buyer. And even though my style has been out of favor, I continue to achieve positive returns, and my return stream is different than yours in the sense that my returns often “zig” when yours “zag” (those are technical terms), and that is outstanding for diversification and volatility reduction purposes. This week I bought US Steel (X), and based on the following chart you can see why.
BH: Bold move, Holmes. And yes—I clearly see the dip you are buying. Apparently, you’re not afraid of what’s going on with newly announced tariffs on steel.
Holmes: Jeff has written about these tariffs in detail here and here. From a technical standpoint, this is an attractive trade. I typically hold for about 6-weeks, and I use price targets as well as macro and some sophisticated stops to control risks.
BH: This is an interesting trade to me, and I’ll be watching closely. I know you’re going to tell me you pay attention to technicals and therefore long-term fundamentals are less important to you, but here is a look at US Steel’s Fast Graph, in case you get curious.
Holmes: Thanks. How about you, Felix—Do you have anything to share this week?
Felix: Yes. This week I ran the Dow Jones through my model, and the top 20 are included in the following list.
BH: I see Boeing (BA) is at the top of your list. That stock has been on fire for about a year now, but it’s sold off slightly over the last week. Could be a great time to buy for longer-term momentum traders. You usually hold for about 66-weeks, correct Felix?
Felix: Correct. How about you Oscar—Do you have any trades for us this week?
Oscar: Yes. This week I ran the comprehensive and diverse ETF universe through my model, and the follow list shows my top 20 ETFs
BH: You’re definitely a momentum trader, Oscar. I see your top two picks this week are an online retail ETF (IBUY) and an Internet ETF (FDN). That makes sense given your style, and the continued strong performance from those groups of stocks. Are you afraid those rallies will end badly.
Oscar: I’m not afraid because I am a technical model—not a person. Therefore my decisions are objective, not emotional. Also, I use some sophisticated stops to control risks. Further, I know Jeff likes to implement me in coordination with at least one of the dip-buying models, so in aggregate we put up strong numbers without being over exposed to any one style.
Many energy companies (and their stock prices) continue to struggle for a variety of reasons including commodity prices, interest rates, and new regulations from the FERC. Meanwhile, momentum and technology stocks continue to sail higher. We’re seeing attractive technical trading opportunities among certain energy stocks, but we continue to implement those trades in coordination with momentum strategies in order to keep expected returns high while reducing style risks and reducing volatility.
Background On The Stock Exchange:
Each week, Felix and Oscar host a poker game for some of their friends. Since they are all traders, they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check out Background on the Stock Exchange for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am usually the only human present and the only one using any fundamental analysis.
The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities.
Stock Exchange Character Guide:
|Character||Universe||Style||Average Holding Period||Exit Method||Risk Control|
|Felix||NewArc Stocks||Momentum||66 weeks||Price target||Macro and stops|
|Oscar||“Empirical” Sectors||Momentum||Six weeks||Rotation||Stops|
|Athena||NewArc Stocks||Momentum||17 weeks||Price target||Stops|
|Holmes||NewArc Stocks||Dip-buying Mean reversion||Six weeks||Price target||Macro and stops|
|RoadRunner||NewArc Stocks||Stocks at bottom of rising range||Four weeks||Time||Time|
|Jeff||Everything||Value||Long term||Risk signals||Recession risk, financial stress, Macro|
Readers are welcome to suggest individual stocks and/or ETFs to be added to our model lists. We keep a running list of all securities our readers recommend, and we share the results within this weekly “Stock Exchange” series when feasible. Send your ideas to “etf at newarc dot com.” Also, we will share additional information about the models, including test data, with those interested in investing. Suggestions and comments about this weekly “Stock Exchange” report are welcome.
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