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II Insight 

March 2011

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Welcome to the March edition of the Investors Intelligence Insight. This free-to-receive publication highlights some of the developments we are seeing in the markets and puts the spotlight on a few trading opportunities.

This month, Tarquin Coe from our US office takes a look at the price action in Crude Oil, comparing the current activity to that seen over the last oil price shock, and the surprising impact seen on sector rotations.

You can keep up with Tarquin's views on a regular basis with a subscription to The Coe Report.

Meanwhile, from II's London office, our commodities analyst Cornelia Dicchio takes a look at Silver. We have been fans of this laggard within the precious metals group for some time, and with the commodity now running with the bulls, we offer some thoughts on an upside target. Subscribers can follow Cornelia's analysis on a daily basis with the Investors Intelligence Commodities Hotline.

In next month's II Insight, Mike Burke will be giving some insights on the "HI-Lo Pole" and "Overextended P&F" formations. I will be taking a look at Key Day Reversals, and how best to utlise this popular chart formation.

In the meanwhile, best regards from the team in London and New York. Please feel free to drop us your feedback at analysis@investorsintelligence.com.

 

Regards, Mark Glowrey

The Crude Oil price rally in the first half of 2008 was spectacular. Once oil got its claws above $100, it spent a month trading in a range up to $110, before embarking on a five month rally to an all-time high on July 11th 2008 of $147.27.  Worryingly, the start of that move had striking similarities to the current break above $100 in terms of timing.  Oil first closed above $100 on 19th February 2008 and this time around, Oil first tested that level on 23rd February 2011. The next level to watch is $110 and that is the crucial line-in-the-sand with respect to seismic rotational shifts between sectors, as highlighted on the next few pages.
 
Additionally, seasonality reveals that February through to May is Crude's strongest period (according to the “Commodity Traders Almanac”). Buying in early February and selling in May offers an 85.2% win ratio, with the trade working 23 out of the past 27 years.
 
Crude Oil can be bought via ETFs. In the Coe Report, on February 23rd when Oil first touched $100, we bought the commodity via the ProShares Ultra Crude Oil (UCO) fund and that trade is still running. The UCO fund is geared, meaning it will mirror the price of Crude Oil by a magnitude of 2x. Less risky, unleveraged ETFS include the United States Oil Fund (USO) or the PowerShares DB Oil Fund (DBO). Charts and analysis of these funds is available with our ETF Review service.
 
So aside from ETFs how else can investor's capitalize on rising oil prices? Analyzing the sector outperformers from Q1 and Q2 2008 should provide clues as to what may work this time around, as history often repeats.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
An obvious beneficiary of rising oil was the PHLX Oil Service Index (OSX), an index composed of companies like Baker Hughes and National Oilwell Varco.
 
As Oil accelerated higher, this index outperformed the S&P 500 by around 40% during the first six months of 2008.
 
The relative trend here really took off once Oil breached $110, so that may be a cue to buy the sector should Oil pierce that level over the next few weeks. Note that once oil topped, the sector literally fell off a cliff, so be sure to have stops in place.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The technology trade also worked as Oil broke higher. Here we illustrated the performance of the NASDAQ 100 (NDX) versus the S&P 500.
 
Tech really came into its own once Oil breached $110 in April 2008. The group beat the market by 7% in the following three months. Stocks heavy in the NDX include Apple, Microsoft and Google.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
The Dow Transports (DJT) was a surprise outperformer. The group outperformed impressively as Oil swelled, beating the S&P 500 by 33% over the first six months of 2008! It kept on motoring higher despite Crude soaring above $110.
 
Big stocks in this group include FedEx and Union Pacific.

The steel sector was another winner as evident from the performance of the Market Vectors Steel Fund (SLX). This Steel ETF beat the market by around 50% during the first half of 2008. Top holdings in this fund include Vale, Rio Tinto and ArcelorMittal.
 
However, it is worth noting that this fund fell sharply on a relative basis once the price of Crude Oil collapsed in Q3 2008, so keep an eye on the ball if trading this field.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gold, the SPDR Gold Trust (GLD), did outperform equities during the first half of 2008, beating the S&P 500 by around 30%. Relative performance here took off once Oil collapsed but there were other factors to consider as the financial system was in free-fall. So a comparison to current events may not be appropriate.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
A surprise underperformer was the telecom sector, as that area is typically thought of as being defensive. The iShares Global Telecom Index (IXP) lost around 8% on a relative basis versus the S&P 500 over the first half of 2008. Shares in this group include names like AT&T, Vodafone, Telefonica and China Mobile.
 
Consumer discretionary stocks, illustrated here using the SPDR Sector Consumer Discretionary (XLY) ETF, underperformed once Oil broke through $110. It wasn't until Oil dropped back through $60 in Q4 2008 did the group get back on its feet.
 
Names in this sector include Walt Disney, Ford, McDonalds and Amazon. So should oil breach $110, these names have no business being in a portfolio (unless they are shorts!).
 
 
The industrial sector, analyzing the SPDR Sector Industrial (XLI) ETF, performed until oil breached $110. $110 is clearly the line-in-the-sand with respect to a defensive rotation from cyclicals. Beyond that level the group went on to underperform for several months. Names from the sector include General Electric, Caterpillar and 3M.
 
 
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In the meanwhile, subscribers encountering this problem should contact Grace Ann in the US office on +914 632 0422 if they wish to arrange alternative payment methods (check etc).

Where next for Silver?

The big move for Silver was the breakout of the $20 resistance in September 2010, the type of clean and clear technical signal that is only presented every few years. The price started to play catch-up with the other members of the precious metals group shortly thereafter, and holders have enjoyed a bull run for six months.

The question is; where next? It is worth considering that plenty of "new money" will have climbed into silver shortly after the breakout, and those holders will be eyeing the round number of $40 an ounce as an obvious target. This ties in well with the 1980's peak around $40.

In the meanwhile, we would expect a minor correction before long, noting the instrument's distance from the rising MA's.  

P&F breakouts made simple

Long-time subscribers to Investors Intelligence will be familiar with our daily "Point and Figure Breakouts", but we receive numerous enquiries from new subscribers on this subject. The basic theory is simple - a breakout shows a reversal of trend on a stock's P&F chart.

In more detail - P&F breakouts occur when an instrument reverses its trend, as determined by the point & figure chart. Bull breakouts occur when an instrument's price rises one box above the prior column of "X"s. Bear breakouts occur on a move to one box below the prior column of "O"s.

Targets are determined from a multiple count of three times the move from the low or high. Stop levels are set at the point at which the P&F trend would reverse.

Here's a clean-looking "Bear" breakout in engineering group Parker Hannifin Group (PH). Traders looking to play the short side will find the stop placed above the highs at 90, and the target at 79.

If you would like to read more about P&F breakouts, click here to download a PDF guide.

Note - we also scan for the following signals on a daily basis:

  • Key Day Reversals
  • New Highs/Lows
  • New relative-to-index Highs/Lows
  • MA crossovers

You can find these on the website under "Signals" on the top navigation bar.

The Chart Seminar comes to New York

Investors Intelligence's sister-publication - the global strategy service www.fullermoney.com has been running its  popular two-day Chart Seminar for several decades. This two-day workshop on trading, tactics and forecasting, presented by Eoin Treacy, Global Strategist with Fullermoney, is coming to New York in Spring 2012.  Following sell outs in Singapore and Sydney this year, we are now canvassing interest in a New York event. 

Dates and venue to be confirmed but if you want to register your interest, please email sbarnes@fullermoney.com and we will keep you posted on developments.

"Thank you for the great service. I also thank Eoin personally for the great presentation at the Chart Seminar in November 2010 in London. My performance has been improving significantly since this time." 

 D.M.S. 15/02/2011

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