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Study Hall
May 1, 2008 - I haven't engaged in the world of academia (thick books, studying, flash cards,...
I haven't engaged in the world of academia (thick books, studying, flash cards, tests) in many years, but my Chartered Market Technician test this Friday has compelled me to return to that world. I've got a foot-thick stack of books I've been going through preparing for it. I'm reminded now why I got through college in 2 1/2 years. Studying isn't my cup of tea. I prefer doing. I was staring at my monitor this morning, not "doing" much of anything, and not knowing what to write, when Slope's intrepid Energy Analyst made a delivery into my electronic in-box. I herewith offer his thoughts... There was a modest short covering rally in energy stocks after the Fed rate cut yesterday as the “statement” was not as explicitly hawkish on inflation as some expected. DUG, in particularly, moved lower as the big-cap names (XOM, CVX and COP) rallied on the close. The reaction by energy names yesterday was a false move, in my opinion. The sector will open lower this AM, as XOM missed the consensus forecast by 5% ($2.03 per share versus estimate of $2.14). More significantly, XOM’s production volumes were down almost 6% y/y. Media pundits are focusing on the decrease in the company’s refining earnings y/y, but Wall Street analysts are going to raise more concern over the production shortfall. The volume numbers were not good, and this has been a nagging issue for the company. The 19% decline in XOM’s African oil volumes y/y will be a major source of investor concern, in my view. Recall that XOM “missed” on earnings and production in July of 2007 and this set off a major correction in both XOM’s shares (from almost exactly the same price level) and the oil sector. A similar move could now unfold. It is not insignificant that hedge funds begin a new monthly performance period today, having realized big monthly gains in energy in April. DUG is already up 3% in pre-market. DUG lagged yesterday because of the last hour move in XOM, which accounts for 23% of the value of the ETF. XOM did raise the dividend by a higher than trend 14% yesterday afternoon, which gave some investors hope of an earnings beat, but another interpretation may be that it was more of a cover for today’s earnings and volume miss. One final note: XOM’s results this AM underscore the investment case for OXY, where EPS were up 137% y/y, versus the obviously more modest 25% increase in XOM profits y/y. Oil may pause near-term, but OXY represents a much more direct vehicle to capture the higher longer-term price with much less volume and refining risk.
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Disclaimer: Please note that charts and commentary provided by the moderator are for educational purposes only. Any trades placed upon reliance on the moderator’s charts or information is taken at your own risk for your own account. Past performance is no guarantee of future results. While there is great potential for reward trading stocks, futures and options, there is also substantial risk of loss and you must decide your own suitability to trade. Future trading results can never be guaranteed. This is not an offer to buy or sell stock, futures, options or commodity interests. Most trading systems are based on historical formulas which have worked in the past. However, what has happened before may or may not happen again. You can lose all your money trading stocks, futures, and options and you must decide your own suitability as to whether or not to trade. Only trade with true risk capital you can afford to lose. Only trade markets you can properly afford to trade. Properly funded trading accounts typically perform better than those that are not. Never risk more than 2-3% of your account on any one trade. Always define your risk before entering a trade and place a stop to limit your risk. There are no guarantees or certainties in trading. Trading involves hard work, risk, discipline and the ability to follow rules and trade through any tough periods during a system’s draw downs. If you are looking for a guarantee, trading is probably not for you. Most people lose money trading. One of the reasons is that they lack discipline and are unable to be consistent. A system can help you become consistent. Ironically, worrying about the monetary aspect of trading can contribute to and cause a trader to make trading errors. Therefore, it is important to only trade with true risk capital.
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