Oil and Gas Equities Outlook for Friday, March 2, 2018
Mar 2, 2018 Trading Blog
The XOP finally showed some signs of strength on Thursday as it finished the day up about 1% in an overall market that was down about 1.5%. It was some rare relative strength that I haven’t seen in weeks.
The real question is what is causing that strength? I think there could be several reasons. Honestly, all of these are pure guesses and none of them could be the correct answer, so take them all with a grain of salt. The first and most obvious reason could be someone with a very large short position (think a Chanos type) decided to use this market weakness as a golden opportunity to cover that position. Had I been short from up near 40 and missed the first market dip down to 31 a couple weeks ago, and then watched my position run all the way back to 35, I’d probably be thankful that this sector turned down again for a second chance at covering. The tipoff as to whether this was a short cover will be how quickly the volume buying stops and how far and how quickly price adjusts to that volume being removed. If the sector opens up today with a short burst higher and then fades all day closing near the lows, it is pretty much a sign that yesterday’s rally was a short cover. Short cover bursts to the upside in a clearly downtrending market happen and then fade quickly to a continuing downtrend.
Another option is that this really could have been someone opening a new long position. I personally don’t see the need for such urgency to open it like they did yesterday, but they did get a great price on their entire order as their own action never really caused any friction or pushed prices against themselves for the entire day. I think there is easy downside to under 30 in the XOP if this early week top in the SPY was indeed a lower high in the overall trend. Everyone can see that lower high and I’m not sure if you thought this was a turning point would you actually be establishing new longs now? Probably not. I know that is the way I see it and there is no way I’d be long of anything right now. I’m not saying I’m right, I’m simply saying that if what we are clearly seeing is right, then opening new longs is wrong. If this was a new long position, I wouldn’t expect price to drop as quickly when they slack off on the buying as compared to if this was a short cover.
I also saw one suggestion that this was share buybacks taking place. For the same reason as a new long, I don’t see anyone being that desperate to want to do a buyback in the middle of a weak market that could truly have another 10% downside to go. Companies are poor at timing buybacks, but they aren’t that bad. Also, every company probably wouldn’t decide to do their buyback on the same day. This strength in the sector came from multiple stocks, and many of those green stocks yesterday don’t even have buybacks, and several of the ones that do were red. These things take time and many companies use the buyback as support under their stock for times when they see price weakness. Today probably wasn’t purely caused by buybacks.
Another answer could be the tariff news we saw yesterday. I saw many articles mentioning possible trade wars in commodity related areas. Oil may have got caught up in that and viewed as a possible trade target or bargaining tool. Also, the fact that the tariffs hit steel could possibly affect the oil and gas industry by causing higher expenses, which in turn might cause companies to cut back drilling, thereby contributing to higher oil prices. I’m not really on board with that reason since many of these tariffs have been expected. The action in things like X, AA, FCX, NUE have all factored this in over the last few months and there isn’t really much reason that energy would have been blind enough to miss this. Of course, maybe it isn’t so much the actual tariff as it is the human reaction to it from other countries. Sometimes the reactive emotions and actions are completely different than the actual placing of the tariff. It is definitely something to watch. It might be a good idea to keep an eye on steel related energy names like MRC and TS, as well as companies that use raw steel to produce things like valves, fittings, offshore rigs, etc.
Outlook for Friday: So maybe we don’t know exactly what caused the strength, but we do see it. It is there and it must be accounted for when formulating a trade plan. I’m still clearly bearish and my concern today will be to see if this buying returns or if it disappears just as quickly as it showed up. If we get a very weak bounce off the open that lasts for less than an hour and then the XOP turns red, I’m going to assume that Thursday was more a short cover than new longs and I’m going to be looking to play short into the afternoon. If the buying returns and the XOP can stay green for the first hour, I will be looking to try and establish a long position somewhere under 33.25 to see if we can get a quick run back toward Thursday’s high.
The worst case for trading today is that the volume disappears and we just drift up and down around the 33 level. Volume will be key today. Yesterday was decent volume around 17 million shares and anything above that today will be a sign that smarter money is active in the market, the real question is which way are they playing it.
As for oil itself, very strange action this morning. The EURO is green, GLD is green, yet oil is down 1%. That is conflicting. Is oil price already admitting that yesterday’s move was wrong? Watch the EURO today, as I think that has been leading much of the oil sector action.
Individual Stocks: To the person that sold me 63 shares of ECR after hours at 1.53, thanks a lot. Seriously, 63 shares? The commission wasn’t even worth it. The rest of the order is still there if anyone else would like to finish it. I’m watching DVN today and would like to start nibbling on it under 30. Just a very small scale in position to get started with it. I’d also like to do the same with APA under 33.50. I think both of those are just ridiculously priced right now, but I don’t want to be too early. NFX is also a target under 23 and PE under 24.50. I’m really trying to wait until the XOP breaks under 31.50 to start in long on certain names.