Last week we laid out how the 'puzzle pieces' were coming together, suggesting that the low in oil prices has been seen.
But just today the Wall Street Journal features a color photo of, yes, a sand mine in Kermit, Texas
The bottom line is, when Kermit, Texas gets a boost in the Wall Street Journal, this is the first sign the boom may be on its way back.
This Column, September 15, 2017
Last week we laid out how the ‘puzzle pieces’ were coming together, suggesting that the low in oil prices has been seen. I was cautiously optimistic about higher oil prices. This week I am even more so. Let’s resume the story where we left off September 15.
Perhaps the most telling statistic is the percentage of energy stocks that are in a bullish or upward trajectory. Handily this can be tracked in stockcharts.com. We noted that this statistic had made a higher low at just over 30% in August. Since then it has grown legs and closed Thursday, yesterday, at an even 50%. When more than 50% of the major energy stocks tracked are in bullish position, by definition, the energy shares have returned to a bull market. Considering that energy has been the slowest performer of the year, this makes this a good entry point.
The energy ETFs are also flashing buy signals. XOP is the Standard and Poors oil and gas production ETF. Since the February 2016 low at $22, it doubled to $44 by December 2016, then corrected to the recent $30 level. It closed yesterday at $32.91. If this were a technical article in a high brow market research magazine, I would add that the price momentum oscillator has just turned up on the weekly chart. But since this is a family general interest newspaper, I will let that pass. Those interested in such details should consult my free weblog, the Market Perspective.
The XLE Energy Production ETF is also rising in similar fashion. The XES Energy Service ETF bounced at $13, similar to its low in February 2016. It is already trading at $15.52.
The bell weather for the drillers is Transocean, RIG. I have noted in several columns that is trading well below book value. The price action got ahead of itself rising from $7.20 to $9.80+ since August 21. Yesterday it dropped 7% losing 69 cents. Best bet is that it finds support at the current 50 day moving average around $8.50. At the closing price of $9.08 yesterday it trades at 25% of book value. Yes this will take a good while to recover. But it fits perfectly with Warren Buffet’s idea of buying companies with a ‘big moat’ around them. It would be nearly impossible to assemble the collection of offshore rigs that RIG has, not to mention the personnel. On a cautionary note, it was RIG’s Deepwater Horizon unit that exploded on the BP project. RIG took a one billion dollar write down on its assets in the wake of the oil price collapse.
Finally, we have the energy prices themselves. Unleaded gasoline has retreated from its recent high of $1.77 falling to $1.66. That correction leaves gasoline in an uptrend. Heating oil has never retreated much from its $.85 low in February 2016. It is over done now having doubled to $1.80.
West Texas Intermediate is trading over $50 pre-market this Friday. A weekly close over $50 is bullish. Brent is in a nice uptrend at $56.09.
How did this happen if the world is awash in too much supply? The answer is that the mood toward the most beaten down sector of the stock market has changed. And there is plenty of demand in the Far East.
We end on a final thought about the most bashed about President ever, Donald Trump. Trump accomplished what no other independent candidate has ever managed. The Oval Office eluded Teddy Roosevelt, Norman Thomas, George Wallace, and Ross Perot. Forty percent of Republican voters indicate they choose him to manage the promised Republican change in Washington which never happened. And so, faced with zero legislative accomplishment since his inauguration, he turned to Chuck Schumer and Nancy Pelosi for a deal. That is the mark of an independent. Now his approval rating has risen three points. Lindsey Graham is scrambling to deliver something to repair the Affordable Care Act. Perhaps this is exactly the positive perception the stock market is rallying on.
Follow Dennis Elam at http:/themarketperspective.com