Inspiration

For those on the sidelines these are frustrating times. While every technical indicator is pointing to a highly overbought situation these markets are going higher… and higher…
Well, trees can grow a lot but not into the sky.
For those being long: enjoy the ride but mind your step. And use stops to protect your money.

So what do we see?

• Brazil continues to surge... the commodity-rich country's Bovespa index makes new 52-week high.
• Starbucks keeps climbing... coffee shop rockets to 18-month highs.
• Oil hits 10-month high... recovering economy drives crude near $75. Sphere: Related Content

Love Boat

On the site Infectious Greed we found the following:

There is a kind of oceanic traffic jam out there among very large crude carriers (VLCCs), with something like 7% (according to Lloyd's) of them storing crude oil off the coast of Europe, Asia, or North America in anticipation of higher prices later this year. Such are the joys of contango -- higher forward prices making it profitable to store petroleum for future sale -- but it is a huge gamble. If the people contracting for such VLCCs are wrong, their carrying costs mount and it becomes likely that they just dumb the product on the markets, further depressing prices.

Check the following figure (from EA Gibson) of the current storage situation for both petroleum and clean products, like gasoil:. While crude sea storage has declined from its peak earlier this year, clean products are floating out there is ever larger amounts.

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I don't like Mondays...

Monday morning in Asia has given way to some sharp moves lower across markets. Shanghai stocks are below 3,000 after gapping lower at the open (last 2975.50), Copper is limit down (5%), LME Copper down $125 from the London close (2% - main support on 3m LME Copper is $5950, last $6120), other Asian bourses are 1.2%-2.6% lower, while risky currencies such as AUD and Asian FX are being sold aggressively - AUD$ traded from .8324 to a low of .8203

From Reuters: "China Investment Corp (CIC), the country's $200 billion sovereign wealth fund, is set to pour up to $2 billion soon into the U.S. mortgage system by hiring mandates under the U.S. Treasury-backed Public-Private Investment Plan (PPIP), sources told Reuters. The firms in talks with CIC are designated PPIP managers and include Alliance Bernstein LP, with sub-advisers Greenfield Partners LLC and Rialto Capital Management LLC; Angelo Gordon and Co LP with GE Capital Real Estate; BlackRock Inc; Invesco Ltd; Marathon Asset Management LP; Oaktree Capital Management LP; RLJ Western Asset Management LP; Trust Company of the West; and Wellington Management Co LLP, said the sources."

From Goldman Sachs: “Closing our long oil/gas ratio tradeAlthough we continue to expect the oil/gas ratio, currently at 20.7 in the prompt contract, to increase further between now and the end of the summer, we believe this is a good exit point. Hence we are closing our long oil/gas ratio trading recommendation at a total profit of 3.37."

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Sunoco

Support and resistance are closely linked to each other. Support can become resistance and vice-versa. Look to Sunoco which broke support around 26 with a sharp decline in June and is now struggeling to surge above resistance. Which will ultimately happen

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Oil markets

It is Jeff Korznik writing about the study economist Robert McCullough performed concerning the volatility in the crude oil market and the spike of July 3, 2008 and subsequent fall afterwards.

We cite:

In his final report McCullough examined the many events and announcements that had the potential to impact oil prices over this period. He found that fundamental factors of supply and demand were not statistically significant, but found (on page 13 of the pdf):

The proxy for the short-lived Commodity Markets Transparency and Accountability Act of 2008 was highly significant. Interestingly, this was the only variable that would have affected excess speculation as opposed to supply and demand fundamentals…. One conclusion to be drawn from these statistics is that the news stories cited by pundits to explain the dramatic spike in oil prices have little or no explanatory power.

In other words, the prospect of regulation of the futures markets had a statistically significant impact on prices. Let’s fast forward to the steep drop in crude this month. While there’s certainly been negative news on the economy, we had some negative news at various points while oil doubled from February. It is at least worth noting that the recent drop in oil coincided with a period in which Washington is seriously considering constraints on excess speculation in the energy markets.

What really interest us, is this:

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Going down.

NASDAQ had yesterday the most daily new lows since March 20. The cumulative advance/decline line recently made a lower high. This just confirming that the break down of the indices is shaping further up.
Also metals and mining were slammed yesterday with a loss of more than 5%. The Natural Gas ETD reached a 52-week low.
Oil prices are down 9% in one week.
And several regional banks hit new lows while the sector lost 25% form the peak in May.

Oil lost yesterday another -2.59 USD/barrel at 64.14 USD. Which trade is unwinding here? Now Solar stocks are trading lower again. They seem no differently than a leveraged bet on oil prices. The biggies in solar land First Solar, Suntech Power Holdings and SunPower Corporation, all traded lower. Even the Claymore/Mac Global Solar energy ETF (ticker: TAN) was hit.

Now, if this correlation is working to the downside, what about the upside?

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Profit taking?

When will oil roll over?

Not yet.

In the mean time, elsewhere...

Coal is going down. Commodity stocks as a whole seem to be under pressure, but this sector suffers quite heavily the last sessions.
Aside: look to big names as BHP Billiton (ticker: BHP). Profit taking time is there. This trade became the last months so crowded, that it became harder and harder for all names here to make any headway. Now they seem to be rolling over.

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It is not only the weakening dollar...

The crude oil futures are now over 71 USD/barrel. All papers are claiming following reasons: the weakening dollar, the buying panic of hedgers and airlines and the lower than expected inventories in the States.

Not only the dollar is here the culprit, as the price of crude is also in EUR rising. It's all part of the game where the unwinding of the contango is raking huge profits for all those players who bought oil a couple of monts ago in the spot market and sold it forward.

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The oil-scam

Now, here is a nice one. It has to do with the contango situation in the oilmarkets. Due to the fact that there was such a huge difference in spot and forward prices some months ago, the ETF’s shadowing the futurecontracts were not picking up at the same pace as the futurecontract itself. The reason is that these ETF’s have to deal with volatility and other specific technical factors.
So the last couple of months the USO ETF could not perform in the same way as the underlying.

From Phil’s Stock World we have following comment – by the way guess who is handling all that USO cash flowing in? Right. Goldman Sachs. –

So here you are giving your money to an ETF that gives its money to the biggest shark in the ocean, who chews off your legs in transaction fees and contango spreads BEFORE they even bother to circle around for the kill by gaming the market. NOT ONLY THAT, but the idiotic rules of the fund lead them to PUBLISH THE DAYS THEY ARE ROLLING IN ADVANCE so every little shark in the sea knows exactly when and where to feast on your bloody, bobbing carcas this month - and the next and the next and the next. Don’t worry though, once you are chewed up and digested, there will be a fresh round of suckers herded back into commodities and the commodity pushing stocks and ETFs every time GS, MS or Cramer need another payday.

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Oil, gasoline and the rest....

The WTIC oil future took a hit this morning after an unexpected build in the US crude inventories.

De market expected a drawdown of 1.4 mio barrels but there was a build in crude stocks of 2.9 mio barrels.
But if one look to distillate stocks, we see that they are just on growing, far above the average.
One of the main consumers of distillate products is the US industry. Not so good.

We know that one barrel of oil produces gasoline and other distillates. Gasoline is traditionally the product that is maximized.

From the FT:

But that dynamic began to change over the last few years leading to some expensive refinery adjustments for the purpose of producing more distillates.
Which brings us to today. Refineries have no doubt been switching back to their old gasoline-max settings, and yet there appears to be no slowdown in distillate overproduction. This is troubling because the greatest danger for the price of oil is the appearance of a massive mismatch in the distillate/gasoline demand picture. It skews the overall price scenario for crude. While a lot of the excess distillate can be exported out, a global industrial slowdown creates the risk that exports might not be a sustainable solution for long.

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The commodity bull run

The medicine is working.
Resulting in rallies in all asset classes.
The global economy seems to be bottoming.
If the recovery is healthy, is not sure. Because this time it’s not driven by consumers but by governments. Until now.
The last couple of weeks we observe that commodity markets are picking up again. One striking example is oil.
Look to what is happening there:

We can debate what reason is driving oil price higher, but what matters is that oil prices are up. And keep moving up. The rounding bottom and some upside stories are playing out in news and charts. And interest is returning.

From GS:

Being short is no longer an option... you either caught the bull flu and started buying stocks that have lagged, or have decided not to get involved. This is where we are now. Consensus is no longer expecting a difficult H2, instead we are trying to question how far we are in the new growth cycle. Staggering change of sentiment over the past 4 weeks. I will not go on again about what the potential risks facing equities but just looking at the facts: yesterday was our busiest day in a while (sign of a top or start of a big bull trend), the low quality stocks are the ones that have been outperforming, earnings haven't played a big role in calling stocks, it's been more about ownership. Less owned stocks have fared better (UK, Swedes, RUKN) vs well owned (GLE, CSGN etc) which tells me this continues to be more about positioning than a big repricing of growth and the cycle.


A rally is a rally. Overbought or not.
And what if this one was elaborated to give companies the possibility ro tap the marktets for more money? Just a thought.

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This sector is breaking out...

Schlumberger is an example of how the oil service industry fared lately. Looking to the first quarter earnings of this company, we observe how they tumbled with 30%. The world's largest oilfield services company said net income in the January-to-March period fell to $938.5 million, or 78 cents per share, versus $1.34 billion, or $1.09 per share, a year earlier.

But if one take a look to the OIH index than we see the bullish sign.

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USO and FAZ

Will the oil price rebound anytime soon?
As far as the oil ETF is concerned (ticker: USO) not. The modest rebound of the last week is not met with stronger volume.
On the contrary.

The renko chart of the Financial Bear 3x Shares ETF (ticker FAZ) seems to be bottoming. Does this mean that good news from banks have lesser and lesser impact?
Now, in recent days more than 125 million shares were traded in the FAZ. That’s a lot. That’s more than the combined trading volume of Microsoft, Intel, IBM and Exxon combined. Without any doubt this fact is influencing the prices of the underlying bank names, because this ETF is constructed as a derivative in order to generate the three times leverage.
It’s clear that a lot of trading power is hooking up here.

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Citi of Sins

If we run a scan based on our renko charts than it’s worth to note that of the 26 names with a sell signal in place 80% are oil producers.

And Citigroup.
The huge rally – due to a short squeeze – seems to be over and out. For the time being. A down trend was established and is taking his toll.

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This one was a beauty...

A few weeks back we showed you the bullish percent index from energy stocks within the S&P500. Our accompanying note was that more than likely a bottom was in the making. Yes, I hear one say, but all the shares went higher in the mean time.
However - this one was right on the mark

This index displays the percentage of oil stocks trading with bullish technical patterns. Oil stocks are overbought whenever the chart rises above 70, and the sector is oversold when the chart drops below 10.

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Chicken wings

Something strange is going on. Cocoa has reached his highest level since 1985. How come?
Because the currency, this commodity is denominated, is the pound sterling.
And the sterling is making lows not seen for many, many years versus major currencies. The central banks around the world have had a contest to see which could cut rates to zero the fastest (Japan doesn’t count; it has been a mess for over a decade). The goal in times of global slowdown is to devalue your currency to aid exports and jump-start the economy with cheaper relative prices and more money to spend in the system.
The dollar is not strong. It’s just not as weak as some other currencies of economies that are also in serious trouble. The currency fun and profits are about to begin.
Now where will this lead us?
As a currency goes down, commodities rise. Most of them are expressed in dollars.
We read an article about a problem the Super Bowl Sunday event has provoked: a shortage of chicken wings doubled the prices in some areas.
In the sixties the Anchor Bar of Buffalo, NY, started to use the wasted wing parts. Now there are plenty of breasts and legs, but there is a shortage of wings.
We all know that a chicken is nothing more than packed corn.
Will a weakening dollar and a stronger demand reignite the corn price again?
And what will happen if the oil price will pick up again?
You never know….

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Golman Sachs warns against speculation - the world has changed

What’s happening to oil prices?
The bubble which exploded last July, resulted in a collapse which was seldom observed for a major commodity. Now, this is leading to a rare and huge contango situation.
And the last days we see an unprecedented inflow in oil ETFs.

ETF owned barrels were at a low in November with 10 million. Now it is at a high of above 100 million.
Now, we mentioned before how this contango is influencing the roll-over factor in the pricing for an ETF as this ETF’s are based on futures contracts.

An ETF as USO is not longer reflecting the correct spot price due to this phenomenon. This roll-over cost is eating away possible profits.
What if losses are showing up soon and investors are pulling out?

It is Goldman Sachs who pointed out that the number of barrels owned by investors is only down 13% from peak prices, despite a 70% decline in notional value of the price of oil.
But in the mean time GS thinks that the type of investors owning barrels, has changed. Retail and private banking investors are coming in while institutional investors abandoned ship some while ago.

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The rally of the oil price is moving oil related shares. We selected Royal Dutch Shell Plc (ticker NYSE: RDS/A). On the daily renko chart we see that the CCI crossed the minus 100 mark some time ago, but it’s only now that the SAR switched under the price.
A rather small resistance level of 51.75 USD was broken and the next goal is the former top of 58.50 USD. A stop is handed out by the SAR at 42.50 USD.
Why do we follow this Dutch/English combination in dollars? Because our trading account is in that currency. Of course we realize that there is some currency risk.

As mentioned earlier: we prefer to deal on basis of a one hour renko chart. Not on a daily basis.

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