Friday Feb 2 2018

The Correction Begins

The Energy ETF XLE reversed course over the last three days, stalled at $78. Energy Service XES is turning down at $19. Momentum is also rolling over.

Look for energy prices to peak for the time being. All attempts at calling a top in the stock markets have failed thus far. But the actions this week could eventually put the brakes on stock market party.

This Column January 26, 2018 a week ago

Now that was helpful information to readers as that is exactly what happened. The stock market retreated from its near vertical parabolic rise. The DJIA is down another 200 points as I write this Friday Morning.

Last week we suggested that Cliff Natural Resources was a potential ‘canary in the cola mine’ for what was liable to happen in the markets.

Prior to the invention of electronic devices to measure air quality, coal miners would literally have a live caged canary in the mine. If the canary looked il or died it was a warning to exit the mine. The warning is worth repeating.

The stock price had rallied form $5.75 to $8.75. The price jumped to $9.15 on the news. Then price immediately reversed closing at $7.89, just over the low at $7.60. Technicians refer to this as an outside reversal day.

My target became $7 for CLF.   Sure enough this morning it is trading at $6.80. I still believe we will see a substantial commodity price rally over the next couple of years. What we are witnessing with the price decline of iron ore producer CLF is a shake out to scare off the weaker players before the action really gets under way.

The West Texas oil price is firm this morning at $65.59, thank you weak U S Dollar. We also warned last week that the at odds comments by the Treasury Secretary and the President at Davos were unsettling the markets. Such odds are inexcusable from leaders in those positions.  I am encouraged that Trump did not mention NAFTA in his State of the Union. And just this morning we have some positive reports on the NAFTA negotiations.

Our predictions are correctly playing out in share process. The energy ETF XLE ran form $61 to $78 in five months time. This morning it is breaking its 34 day exponential moving average (I know that sounds really techie, eh?) to the downside. A $68-70 target seems reasonable.   Energy Service XES is breaking down in similar fashion. In the same time frame it ran from just under $13 to $19.   Sixteen dollars seems reasonable for XES.

Meanwhile the US continues on its track to energy independence. As the Wall Street Journal notes this morning, President Obama called Sarah Palin’s motto of Drill Baby Drill a bumper sticker as recently as 2012. Who’s laughing now?

In 2006 the IUS imported 12.9 million barrels a day mbd. Last fall we imported only 2.5 mbd. And last fall the US exported 1.5 mbd. We have noted this has kicked off billions of dollars in port construction in Corpus Christi.

Natural gas production increased 50% between 2010 and 2017.   Natural gas futures have fallen from $3.50 to $2.86 in the last eight days.

The oil industry has quickly adjusted to the price drop and is now profitable with the mid-sixties pricing.

We have consistently warned that the Dow Industrials DJIA were some 4,000 points above its widely watched 200 day moving average. Even with a 250 point sell-off this morning the DJIA is 3,500 points over its 200 day MA. The market has needed a correction. Whether is was a top or the top remains to be seen. For now the litany of good news cited in the State of the Union, low unemployment, paycheck bonuses, new plants being built, should support a correction and then rally into the usual seasonal high in May.