Oil and Gas Equities Outlook for Tuesday, February 6, 2018
Feb 6, 2018 Trading Blog
The energy sector got crushed again and we have run from 40 all the way down to 34 in about 8 trading days. This is one of those things you know can happen, but that you never really expect to see. This is the reason stops were created, so make sure you use them.
Luckily, none of my positions got stopped out, at least not yet. PE and ECR actually finished green on Monday, while JAG took a small loss of about 1.8%. My worst position is the XOP long, but I don’t worry too much about that one since it is an index and shouldn’t get too out of control. It is also one of those positions that I wouldn’t mind taking above 10% in the account, so if it wants to keep dropping, I’ll keep adding. The position sits at about 8% right now and will likely be at 10% after the open Tuesday.
So what is going on here? Honestly, I don’t know. But I do know that this market disruption probably isn’t fundamental, it is more of a mechanical problem caused by something that isn’t apparent yet. If we look at the EURO and Dollar Index, they really didn’t react that much over the last couple of days, at least not as much as you would expect with the market completely melting down. Same with the TLT and GLD, neither of them are really showing any panic or proportional movement with equities. I think what we have here is some internal stress created by the algos, computers and quants. Something is broken in their strategy and it is having a huge effect on the market. Nothing in the world or economy has changed to cause this huge of a disruption, so it likely isn’t an external problem that is causing this, it is an internal problem. Something that we probably don’t fully understand yet. Something like the hidden mortgage problem back in 2008 that wasn’t readily apparent on the surface. I’m not saying it is anything that large, but just that this whole move could be nothing more than some computer models that handle gigantic amounts of money just totally freaking out. It may be something that they can get sorted out easily and quickly, and the market will continue on its merry journey to new highs.
What do we do now? I’m buying. I’m slowly scaling into the XOP for a long term hold. I’m sitting here looking at 33 on the XOP pre-market, we were just at 40 a week ago and oil is still in the mid 60’s. How can you not buy here? Either you think the market has totally topped out and this is the beginning of a bear market OR this is just a pullback and the market will once again make a move on to new highs. You have to pick one theory or the other and just go with it. I’m not ready to concede to this being a bear market just yet, so the only choice is to see this as a pullback and a buying opportunity. I may be wrong, but if I’m right, this is a huge opportunity to make a quick killing.
Outlook for Tuesday: At this point, normal strategy for me is completely useless. I depend on prior day high/low, 1/2 ATR, VWAP and intraday support/resistance and NONE of those things are very useful in a market moving like this. The only thing you can do here is study the larger term picture and pick your spot where you think the market should stop. Locate a concrete place for a stop that will prove you wrong and go with it.
There is no way I would short at this point though. When this overall market disruption gets sorted out and things bounce, it can absolutely rip your face off. There are many novices who are trying to play this short and when the market starts running back up, those guys are going to cover at any price. Controlling risk against shorts who are trying to cover at any price is a losing tactic, it simply can’t be done. Shorting right now might be the higher odds play, but it is also the play that will cost you the most money (and possibly way more than you intend to lose) when it doesn’t work. And just like the collapse, you never know when someone like the FED, Trump or Mnuchin will come out and make a market saving comment that will ignite the spark releasing the pressure back to the upside. Just like we knew a pullback would eventually happen, I can guarantee that a bounce is coming after this pullback.
{Edit 8:02} I forgot to mention, keep an eye on the 33.75 XOP level, as that is the .618 Fibonacci retracement level of the entire run starting back in August. Many people (as well as some algos) watch this level.
Individual Stocks: During times like this, my approach is simply to play the XOP. I have tried to play individual stocks in huge market moves like this, and if you pick the wrong stock, you can miss the entire move. I’m taking the safe route and sticking with the index. I do have a few stocks, but right now I’m not planning on adding any stocks unless something just becomes too good to pass up.
Good luck out there today. Keep it safe, try to stay calm and play cautiously.