Under 7500 - Here To Stay?

IBDAnother critical barrier has been surpassed today on the path downward, as we closed under the critical 7500 number, which has been known to be the rubber bottom in previous months. A move to keep us under 7500 would be a big victory for bears going into the weekend, especially after enduring the several new mortgage announcements we have received this week. So we'll see if the bears have it in them to fight one more day.

I do regret having sold some of my SRS at $80 as there is definitely wind behind seller's sails. At this rate, I believe we could see SRS getting into the $100's very shortly. I have not completely abandoned my fears of a rebound rally, but I can definitely see a strong seller's market right now. Tomorrow will act as a critical day, seeing whether or not we can maintain under 7500. By doing so, I will probably find myself buying some options of SKF, SRS, and FAZ.

Oil has been on my radar the last couple months. As we saw today from DXO (up almost 15%) and other oil funds, there is definitely upside there. I recently was introduced to a distant in-law, who has quite extensive experience in the oil sector. Robert Dupree has a Masters Degree in Economics and, for most his career (30+ years), was engaged in developing and managing systems in support of exploration for oil and gas for Amoco. Along the way he was able to learn certain truths about the industry that I felt very applicable to the site and worth sharing. The following are excerpts from what he said from our conversation:


"I don't think that fundamentals had much to do with the spike in oil prices last year. I think that oil will play a significant role for decades to come. Our reliance on oil will persist for decades under our existing infrastructure and I don't see significant changes ahead for it. I would be inclined to invest as much in oil services as much as in actual energy companies. Companies in the service segment such as Weatherford or Schlumberger are worth investigating. They're being hit right now but their type of service will be vital for quite some time.

Regarding oil prices, they are run mainly by a cartel which must balance supply with the need for revenue. They cannot afford to be as political with oil as they were in the 1970s and they know it. The biggest factors that might affect oil prices are of the "Black Swan" nature which cannot be predicted. They would likely come from political events that could disrupt supply.

The romantic thrill of drilling and making a major discovery is still in the public's psyche. It's akin to the lust for gold. Politicians play upon it and the oil industry uses those offshore rigs as much for image as for real production. The oil industry is not lukewarm about more offshore drilling in the U.S. There is probably less than a year's supply of oil for the U.S. yet to be tapped in ANWAR and off of our coasts. Also, the lead time to manufacture the offshore rigs and put the infrastructure in place is at least a decade. What you have to watch for is new guys who might bid to acquire those leases. When Bush opened drilling in Utah, for example, the operators that came in were not very nice guys. "

As you can see, there is a lot going on behind the scenes that most people never become aware of, in dealing with oil. I'm getting very close to pulling the trigger on some oil stocks and ETFs. Not just necessarily for a short term gain, but for some long term potential. It is clear that it is still our biggest natural resource demand and is one the hardest, so far, to duplicate. I want to say thanks to Robert for taking the time out to share his thoughts with me and all of you and look forward to continuing our communication. I will be looking for an entry point for DXO shortly, which has a Market Club report score of -90 (get your own symbol analyzed for free, all you need is a name and email, Click Here), but I feel more and more oil has settled near its bottom. Also, OIH or even shorting DUG (Ultra Short Oil ETF) could be in my near future.

Tech is by far holding up better than the rest at this point. I have no faith in any financial institution at this point and don't even trust playing them as a short term bump anymore. I am all out of my FAS now and don't see myself getting back into them anytime soon. If I need to play the long side, I will look to companies in tech or even insurance companies. A breath of nationalization could send banks soaring down on any given day. I will, however, sit on some FAZ or SKF to try and take advantage of the speculative worries.

Keep your eye on the CPI number tomorrow. Expectations are a 0.3% change, which I would be very surprised to see us reach. A bad enough number here, coupled with more aggressive selling, could end the week on a strong selling note. As you can see from below, a force definitely wanted the market to rally right before close, but seller's would not back down. We are in a very different environment than we were in November.

dji_2_19
Another critical day tomorrow. I plan to be up early and ready. It's always tough deciding whether to make moves on Friday, but tomorrow may be a day I do. I'll look for you guys on chat tomorrow and keep you posted. Also, yesterday I was asked to write a guest post for INO's Trading blog. So being my "bear" self, I decided to go with a bear topic. You can read it here. Remember to Sign up for the $200 promotion for Lending Club, click here for more info. Happy Trading.

4 comments:

  1. denis Says:

    nice post keep up the great work!

  2. Newbie Says:

    Interesting post. I've already dipped into oil related stocks. I'm always watching OIH and have to say high 60's or low 70's seem to be an excellent entry point and high 70's, low 80's are the exit points if you are playing this in the short term. I'm sticking with my SRS as well, though I have been close to selling several times yesterday and today. The last hour of trading today convinced me to stick with it. I'm confident there is more upside, but as of now will set a stop order around 7-8 % of today's close, just to hold onto profits (will adjust as SRS continues to rise). Also, I'm actually taking up a position in FAS because inevitably I feel the financials will have some sort of rally, for what reason I don't know yet, but at FAS's current price I'm happy to speculate. I'm not putting in a stop order either, I'm going to keep adding to my position if it continues to go down. I'm not worried about nationalization, it's just too complicated for the nitwits we have in power now. I'm not even sure they know how to tie their shoes. Happy Trading everyone.

  3. Newbie Says:

    ...oh, how about Meredith Whitney to take over for Timothy Geithner. God, I lover her.

  4. QUALITY STOCKS UNDER 5 DOLLARS Says:

    All markets find a bottom sooner or later.