Thank you, thank you, thank you. Whoever dumped oil contracts on Friday I thank you and I hope you have plenty more to unload. The price of oil cratered -$5 between Wednesday's high of $69 and Friday's low of 63.90. I actually got some of that drop with a QM short entered on Wednesday. When the spike came within 20 cents of the January 20th high I took a shot and it worked out well. I don't recommend everyone dabble in the energy future because fast moves do occur and not always in your favor.
When oil hit $64 on Friday I nibbled on some new positions but only cautiously. $64 should be decent support but as we have seen in the past these corrections can take on a life of their own and develop momentum well past initial support. However, I went back and reviewed the charts for the last year and the initial dips were normally limited to something in the $5 range. Once the dips were bought we saw a second or third wave of selling about 50% of the time but only the Sept/Oct decline developed any momentum to the downside.
The $64 level should be a buy point for a trading buy. If no further drop appears we can add to positions as time passes. Personally I would love to see another wave down to the $58-$60 level to really clear the stops and provide a setup for a summer trade. However, if wishes always came true I would already be a Powerball winner.
Energy earnings have been very strong once again and they will be instrumental in keeping the S&P earnings growth in double digits for one more quarter. Unfortunately these earnings continue to attract supporters of windfall profits taxes. I doubt they will succeed in passing anything material but there is always a chance. Ironically the passage of a new tax could reduce funds available for exploration and indirectly cause oil prices to rise even further. Long term investors should continue to benefit either way but it does produce one more thing to worry about.
Current play Valero posted record earnings of $1.35 billion and CEO Bill Greehey said 2006 will be the best year ever for the refining industry. Fortunately for those not already in the play the post earnings depression and drop in oil prices produced a new entry point at support at $58.
The natural gas sector rallied on the arrival of cold weather but imploded when gas prices collapsed again on Wednesday afternoon. Accu Weather is predicting below normal cold for the Midwest through the North East for the next two weeks. It should not matter to gas prices since current supplies are running more than 500 bcf over the five-year average. January was the warmest on record in many areas and it would take a monster cold front with prolonged sub zero temperatures to impact gas supplies substantially. The winter run is over and warmer weather is just ahead even though the ground hog saw his shadow on Tuesday. This may be the last real cold front of the season and prices could retreat under $8 once it passes. The retreat should be short lived once the summer cooling season arrives but that is still several months away.
I have mentioned numerous times that I felt the oil prices over $60 were doomed to fail because fundamentals simply did not match the price. There was a $10 risk premium attached to every barrel and the closer we got to the spring demand slump the harder it was going to be to maintain it. It was tough repeating that mantra every week and not jumping on the energy train but I knew that prices would eventually break as long as shots were not fired in Iran.
The problem now is deciding what to buy and more importantly WHEN to buy. $64 is the first threshold with $58 the likely bottom. OPEC should support prices in the $55-$58 range. Only about half of the energy stocks in my screen saw a bounce on Friday suggesting that there is still some sector rotation ahead. That is fine with me. Knock the heck out of them and we will buy the dip. However, I am not going to get caught watching and waiting for a dip that never comes. We are going to aggressively add to the watch list with some triggers that bracket the current price. We may not get the bottom but we will not be standing on the sidelines either. It is time to start spending some of that cash we have been hoarding.
Overstock.com announced last week that they were going to release earnings next week. This produced more than a $1 bounce despite the fact they have already warned. There are simply too many people buried in this stock and believing the spin. The CEO Patrick Byrne will find someway to spin his bad results and produce a bounce or at least I fear that will happen. We entered that short at $38 and OSTK is $23.86 today. Pigs get fat and hogs get slaughtered. I am recommending an exit on Monday and let's take that +150% gain and buy energy. Patrick can continue his fight with the Sith Lord without us.
Looks like we made the right decision last week to exit KKD. The new 90-day deadline for filing financials produced a lot of buying and a new five-month high.
Headwaters made us proud this week and removed a lot of the false anxiety I had been feeling as the stock declined. Nearly a $4 gain for the week put us right back near a new four-month high.
Crude Oil futures Chart - 60 min