WASHINGTON – Let’s take a look at some thoughts on our currently vulnerable stock markets from some writers and experts I generally trust. Relevant topics appear in no particular order. But they do add up to my current investment thesis: Sell energy and big bank stocks. And avoid going out with the selling tide. There’s time to get back into these sectors later.
Meanwhile, for some deeper background, check out my previous article on our insanely headline-driven markets.
Now, let’s look at the underlying issues involving our current economy. And likely to influence markets in the weeks and months to come. Then, let’s take a look at what we might do to protect our portfolios against the investing predator class.
Global Warming Climate Change… Again
Tom Luongo offers some compelling observations on the mega-wealthy Confederation of Dunces – aka, Davos – currently underway in Switzerland. And focused with laser-like intensity, of course, on the perils of
global warming climate change that stand ready to exterminate mankind in, well, now even less than 12 years.
“[Economic responses to this so-called crisis need to begin unfolding] before people really begin to question the whole nonsensical runaway greenhouse gas nonsense as they dig themselves out of snowfalls not seen in a hundred years.
“When Mark Carney, a central banker, is showing us maps of Florida before and after a 9 foot rise in global sea levels, the whole climate change narrative hasn’t just jumped the shark, it’s carved it up and served it for dinner.
“And since they’ve already destroyed one generation of savers, they have convinced the next one that it is good and virtuous to have less, to have lowered expectations, to eat bugs and fake meat and all the rest of it.”
This, and not mass ignorance of “settled [fake] science,” is why nationalist and populist sentiment has begun to make headway against the mega-wealthy, feudalist oligarchs and their international Deep State thugs who want to destroy life possibilities for the middle and working classes to enrich themselves by creating an apocalyptic scenario that will panic the Great Unwashed into agreeing to sacrifice their families and their lives for the “greater good.” Of these multi-billionaire thieves and their political and media minions, that is.
Energy stocks continue to get clobbered. Too much of a good thing?
After ruthlessly badmouthing the fossil fuel industry throughout his disastrous 8-year presidential term, Barack Obama relentlessly pursued his own Prime Directive. Namely, to squeeze energy supplies so hard that the price of fossil fuels would rise to unimaginable heights. At which point, normal people would no longer be able to afford to heat and light their homes. For some reason, they would then happily move to “pollution free” energy sources.
Contrary to this destructive policy, in just 3 years of his administration, President Trump fully unleashed the creative and scientific powers of the fossil fuel industry in this country, making America the new premiere energy producer in the world. Which, ironically for those hero energy companies, is starting to put a serious crimp in corporate profitability, given the sheer abundance of what they’re currently producing. That’s why it might be time to sell energy issues, at least for the moment.
This radically changed energy situation will work out in time. But in the meantime, the good news is this. Our current overabundace of fossil fuels frees the US at long last, from total dependency on Middle East potentates for America’s energy supplies. Further, US energy production and consumption is cleaner and more efficient than ever, vastly outdoing all the countries that constantly bleat about climate change and berate the US for its energy consumption. While ignoring countries like China and India, which are the really serious polluters.
This economic / philosophical disconnect has begun to work itself out in the stock market, particularly in the energy sector, which has remained under severe pressure since some point last fall. On the other hand, our “sell energy” decision is an ironic answer to “settled science” that said we were at “peak oil.” Ten or twenty years ago.
Long term sell signal in energy?
Via an excerpted free piece in Stockcharts.com, Erin Swenlin observes the following Long-Term sell signal that’s causing a further retreat among stocks in the energy sector.
“Today’s [January 21, 2020] giant drop in the Energy Sector (XLE) was enough to negate a very young Long-Term Trend Model (LTTM) BUY signal. That LTTM SELL signal was generated when the 50-EMA s[a]nk below the 200-EMA. With oil and gas producers Exxon-Mobil (XOM), Chevron (CVX), ConocoPhillips (COP), Phillips (PSX) and Occidental Petroleum (OXY) taking up over 50% of the capitalization on XLE, I wasn’t surprised to see the drop. USO [the US Oil ETF] dropped .75% and I’m sure this could have affected these big companies. With price dropping well below the 200-EMA, I am expecting this LT Trend Model SELL signal to remain in effect. I would look for price to drop and test the November/December lows. “
So would I. I’ve begun to unload my small positions in Energy stocks for small losses. Save for ConocoPhillips (COP), which remains a big win for our portfolios despite dropping twice this week. It’s probably time to scoop up that profit and run. Otherwise, the mantra here is “sell energy.” And don’t get anywhere near nat gas for now. Frackers have found so much of it that this resource currently sells for below what it costs to extract it. I guess too much success is occasionally not a good thing.
Big Bank stocks decide to tank
Greg Schnell notes something that’s becoming painfully obvious. Q4 2019’s big winners included stocks in the Financial sector. Particularly buoyant were the shares of most major US banking institutions. But the fates looked less kindly on these mostly big bank stocks as 2020 got underway.
“Bankers have been one of the strongest areas in the market since the October 15th, 2019 JPM earnings. In December, they began underperforming the $SPX, and with JPM reporting year-end last week, it’s a good time to review the bank chart. It was not just JPM who reported; we also heard from other systemically important names like BAC and C.
“It’s too early to call a major top in the financials here, but it is not too early to scope out “what-if” situations. If financials are starting to put in lower highs even after the Fed has started the easing cycle, we should all be prepared for a market correction that might be signaled by a weaker bank chart. As one senior bank technician told me during my first trip to the CMT Association symposium, “When the banks start making lower highs, be concerned.”
While we’re discussing the financial sector, let’s look at XLF
The Financial Select Sector SPDR ETF (trading symbol: XLF) offers some proof for the weakening of this formerly robust S&P sector. Personally, I think the big bank stocks are doing well, and should continue to do so. But I also think they’ve gotten a bit ahead of themselves. So now might be the time to pare back our positions in big bank stocks until the smoke clears. Analyst Julius de Kempenaer would seem to agree. (Or did I get this Big Idea from him?)
“Since the end of last year, XLF has started to give up on its leading role. JdK RS-Momentum started to decline and the tail began to roll over. Last week, XLF moved from the leading quadrant into the weakening quadrant.
“That rotation in and of itself does not have to be dramatic, as there is still the possibility for a rotation through weakening back to leading without hitting the lagging quadrant. But, given the proximity to the 100-level on the JdK RS-Ratio scale, these odds do not seem too big.
“However, inside the improving quadrant, we have XLC moving at a strong RRG-Heading and close to crossing over into the leading quadrant. This is an interesting relationship to investigate further.”
Lightening up on two sectors, looking at two safer ones
So as for now, I think it’s time to sell energy sector stocks and financials, particularly big bank stocks. Or at least most of them. Regarding the former, I think I’ve been too optimistic on recovery in that sector, given the massive US overproduction of oil and gas, thanks to advanced fracking techniques.
Same thing for the big banks. They just got ahead of themselves a bit. At the moment, they seem okay for the longer run. Mortgage REITs – which remained as part of the financial sector after S&P split out property-owning REITs as a separate Real Estate Sector – still seem safe for the moment. That’s due to the defensive characteristics of these traditionally high-yielding stocks.
We can easily replace those big bank stocks in our portfolios. We can do this by investing in the quieter, but higher yielding Real Estate and Utilities sectors. The ETF representing the new Real Estate sector (the property owning REITs) is XLRE. This ETF might be a promising, diversified investment on any pullback, at least for now.
As already noted, the Utilities are another defensive sector. The most identifiable REIT here is XLU. Any number of good-looking utilities are ripe for purchase on a pullback. Individual stocks in this sector could include Clearway Energy A (CWEN/A) and a large, recovering Midwestern Utility, First Energy (FE). Again, both seem a bit ahead of themselves right now. But each could prove attractive on any drop occurring over the next month or so.
Until next time…
Good luck to all of us as we move ahead in a new year that’s already way too dominated by scare headlines. These can unduly affect the price of common stocks as we move into Election Season. So our best strategy here would appear to be lightening up on stocks in vulnerable sectors. As a result, we increase our stash of cash and await a pullback, large or small. That should give us a better re-entry point.
– Headline image: Bakken Shale (North Dakota) fracking job in process.
(Image via Wikipedia entry on fracking, CC 3.0 license)