Slope Of Hope with Tim Knight

Yo, Godot!

Let me start by saying that this tax rebate that Bush was yakking about all day is going to stimulate only one thing: the deficit. The notion that this political gimmick is going to magically turn the sinking economy around is absurd. Those checks are going to be as potent as the Gerald Ford W.I.N. buttons from three decades ago.

Now, there has been something very weird going on with IWM volume. I was going to mention it a couple of days ago, but I shrugged it off. But it's going on long enough that I have to point it out. That way - - the volume is alternating! High one day. Low the next. High one day. Low the next. It's almost a perfect oscillating pattern. I have no conclusions about this. It's just...........weird. The volume graph is starting to resemble a comb!

One area where steady volume is not a problem is crude oil. This market pushed toward the $120 zone today. It's always something. This time is was a U.S. ship shooting a missile or something. God knows. It seems almost any news pushes crude oil higher these days.

Although OIH was, in turn, higher, it isn't making new highs like crude itself. I am very bearishly positioned with respect to oil. It's either going to break very soon, or else I'm going to have a lot of stop-loss orders on my hands.

One of my many positions in this area is BHI, mashed up against its broken trendline.

SLB has surged very strong for most of 2008. This pattern is more speculative.

And, with all due respect to beanie (and you can take that however you want), I've got puts on two major solar stocks. Sunpower......

.....and heavyweight First Solar.........So I can already tell you next week, if FSLR has blowout earnings and I get stopped out, beanie will have 57 posts about how right he was. If the stock plunges, he'll be nowhere to be found. Count on it.

In spite of the markets (irritating) strength today, I still see equities as fundamentally broken at this point.

The S&P 500, on which I own puts, is mushed right up against the underbelly of its broken channel as well as its descending trendline. That's on top of the psychologically important 1400 level.

The Russell 2000, on which I also own puts, is in a similar pattern.

And the NASDAQ is banging against its 25% line on its channel. Now this one I'm more nervous about, since it is sporting a not-too-terrible inverted head and shoulders pattern.

But, as I mentioned yesterday, I draw some comfort from the formidable bearish pattern on the $MSH (whose options, regrettably, are so thinly traded as to not be worth pursuing).

Apple had a strong weak, but I have reason to believe this candlestick today presages a drop next week.

And, in my opinion, IBM blown gassed its way about as high as it's going to go against that trendline; I've got a stop here at 125.

Lastly, the $XBD index has encouraged me to buy puts on investment banks, which have recovered sharply since the BSC debacle five weeks ago. I've got positions in Lehman......

.........Goldman........

.........JP Morgan..........

.......and another "Morgan", this one Stanley.........

It's been weeks and weeks since we've had a juicy, consistent bearish hammering of equities. Oh, I miss those days. But I remain confident that one day soon the bear will be back. He'd better. Otherwise this blog is going to get pretty dour!

Put on a Happy Face!

I'm bearish. Really bearish. Big surprise, eh? But, honestly, the charts are looking sensational.

The one bullish chart, $SOX, seems to have had its run. And the one risky chart, $TRAN, looks kind of Fib-bound to me, and is approaching (at best) its next resistance level.

I'm pretty excited about where things stand now for the bears. Take that as a contrary signal if you must, but that's what I'm thinking. 

IWM Returns

There's been chatter in the comments section lamenting the relatively infrequency of my IWM musings, now that OIH and company have pushed it aside. Well, let me throw you guys a bone:

As you can see, the Fibonacci is doing a yeoman's job of keeping the bulls at bay. There was a bit of a violation of this line a number of days ago, but it was swiftly tamped down.

This morning's lame-o consumer sentiment numbers snuffed out an early rally (I'm only typing this 40 minutes into the trading day, so keep that in mind). I suspect the bulls - like Bill Clinton, shown below - may soon be asking themselves, "what am I getting myself into???"

Critical Juncture. Honest.

As I've mentioned before, observers of financial markets speak of "critical junctures" on, it seems, a daily basis. I try hard to refrain from using this phrase often, but I sincerely think we're at a key juncture at this point, based on the charts.

As a preface, I will note that complacency is as low as it has been all year. The $VIX dipped down into "the teens" again for only the second time in 2008.

Let's look at the bullish case first. Some people have pointed out inverted head & shoulders patterns. The cleanest one I see is on the NASDAQ Composite, shown on an intraday basis below. A clear break above 2,450 or so would be disastrous for the bears. A fully-realized breakout would send this index hundreds of points higher.

A somewhat shoddier inverted H&S is presented by the Russell 2000. But note both the chart below and above have prices getting very near major resistance lines as well. So there is certainly a yin-yang tension at this point.

 Lest I get the bears too scared, allow me to show the next graph, which for me is jumping-up-and-down bearish. Plus, it's a daily graph, not an intraday one, which obviously has far more import. This is the High-Tech index, and this is about as clean a head and shoulders pattern as I've seen in a while. Now, this pattern may have already been fulfilled by the nearly 100 point drop in January. However, the retracement - which has been hammered out over virtually the rest of 2008 - is all the way back to the neckline. This strikes me as a delicious shorting opportunity with relatively low risk.

A somewhat similar retracement is exhibited by the Dow 30, although the pattern is not nearly as clean. Dow 13,000 has been a very important line in the sand, and in spite of the Dow's strength today, that line was still not crossed.

My bearish disposition toward the gold market paid off again. My puts on ABX and $XAU had good profits (about 50% and 100%), and although it's entirely possible I got out too early, I'd rather be safe than sorry. A break beneath $170 on the $XAU may suggest a farther drop to $150 or so. This is a decent H&S pattern, but before you get excited, look immediately before it, and you'll see a somewhat similar pattern that didn't lead to jack squat.

Poor Jana - - battered by China. Your redemption may be at hand! Looking at either side of this line, it's almost like a error image. The reduction of a stamp tax (what is, this, 1775?) is a silly reason for a market to go up. Come on. Get real.

That's all from the Timster. I haven't done a video in ages. Just haven't had the time. If we ever get a real blowout day, I'll probably be giddy enough to do one. Until then, text will have to suffice.

Energy Analyst on OXY

OXY reported strong 1q08 operating earnings of $2.20 per share, fully diluted. These results were up an impressive 137% y/y, and beat consensus of $1.95 per share. Oil and gas income was up 112% pretax and volumes increased 8% y/y. Significantly, these profits were generated on an average NYMEX oil price of $97 per barrel in 1q08. Even with today's decline, oil prices are up another $15 per barrel versus the 1q08 average level. If the increase holds, OXY could earn another $0.35 per share in 2q08. Interestingly, consensus for 2q08 is currently at $1.86, which looks a tad low given that the company just earned $2.20. OXY appears well on-track to now earn between $8.50 - $9.00 per share in 2008, which is above my prior single point estimate of $8.50. Clean EPS for 2007 were $5.25 per share.

Cash Flow in 1q08 was $2.5 billion, or $3.00 per share. Free Cash Flow (FCF) was $1.6 billion, or almost $2.00 per share. OXY stock is now trading at just over 10x FCF, which appears cheap. OXY management emphasized that they would not let cash build on the balance sheet and indicated that the board would consider a dividend increase. OXY did buyback 6.3 million shares in 1q08 at a cost of just over $400 million. Management stated that oil and gas volumes would likely be higher in 2q08 versus the prior quarter and would be higher in 2009 versus this year's projected levels.

OXY shares are down along with the commodity today but the stock remains one of the cleanest ways to participate in a strong oil price environment. Traders could consider going long OXY on this pull-back and go long 1.0 - 1.5 shares of DUG for every share of OXY as a hedge. The exact ratio of OXY to DUG is driven by how tight one wants to construct the hedge.

IRA Longs

I owe you guys a good post. I know I do.

In the meantime, I'll confess that, in my IRA, I've loaded up with ten "battered" issues and have trimmed my DUG (double-inverse on oil and gas) from 2800 shares to 1800 shares.

The other ten long positions are small (about 5k each), but even shortly after the entry the screen is all green. I've got relatively tight stops on all of them, set just beneath the lows of this week.

OOF, seems Disqus is down (again). ARGH! It's a nice system (when it works). Frustrating.

Mad Dash

I have zero time, so this is going to be quick.

• I started the day seeing gold and oil down sharply. Good.
• I sold my $XAU puts and ABX puts at handsome profits, as they achieved what I felt were good short-term targets.
• I also sold my CMG puts at a nice profit.
  
• My portfolio was up well into the five-digits of profits that morning.
• I took my kids to school
• I return, and my portfolio is down five digits because the indexes blew from Dow down 40 to Down up 120. WTF?

So it's time to look at charts and figure out what's going on and make sure my stops are well-placed.

Late Night

It wasn't that long ago that I'd do one blog entry a day and feel like a champ. This is my 5th posting today, and I'd feel guilty if I didn't get it done. Anyhoo.........

I see that the Chinese stock markets are exploding higher again. The excuse this time is that the government - which seems passionately devoted to propping up its local stock market - dropped its "trading tax" by two-thirds. That sounds like a lot, but this tax went from 3 tenths of a percent to 1 tenth of a percent. In spite of what sounds like rounding error to me, that was cause for celebration in China.

I've noticed something else as well - - "calling the bottom" has become a passionate hobby these days. It seems like everyone is convinced that the grueling (10%), extremely long (weeks and weeks) bear market is finally at an end. I offer ABK as a symbol of the danger of bottom calling. At every one of the tinted zones shown below, one could have plausibly said, "prices have stabilized and things are settling down; time to buy!" And you can see what happened each time.

A deeper example of how badly people can get it wrong sometimes is Starbucks. This company, which dropped another 10% after hours today, has been falling for months. But go to Amazon and do a search for Starbucks, and you'll see a mountain of books that tell business people how they can emulate the Starbucks way to forge their own prosperity.

I won't bother showing the OIH graph for a millionth time; it has displaced IWM as my obsession these days. I will tip my hat at the reader who turned me on to DUG, the double-inverse fund. I put my entire IRA into this item, and it's up nicely over a just a couple of days. I could see 20-25% more over the coming weeks, possibly. I've drawn a tiny red line indicating my entry point.

My puts in ABX and $XAU are doing nicely. Gold is really starting to take a beating. I'd consider getting out when it gets down to that purple zone. Until then, I'm holding.

I have a kitchen in serious need of cleaning, and as a Felix Unger type, duty calls. Good night, and I'll see you in the ante meridian.

Those Poor OTMs

I am about to get on a plane, so I only have a minute. In fact, I am writing this from a wheelchair at the end of a ridiculously long breezeway at Salt Lake City's airport. No, there's nothing physically wrong with me. It's just the only place to sit.

Anyway, AAPL reported after the close, and it was one big meh. It was down about $5 early, but looking at it a moment ago, it's only down a few pennies. At least it's not a blow-out. And Amazon is getting a few bucks knocked off it it, too. Good.

The ones that really got screwed are all those people that bought way out-of-the-money calls and puts thinking they would "pull a GOOG" on Apple (or AMZN, for that matter).. Surely you know by now that the God of Trading loves nothing more than to laugh his divine butt off at traders. So all those who missed GOOG and thought they'd make it back with AAPL were disappointed. Again.

I'll do my regular post (very) late tonight. Bon voyage. 

Energy Analyst Answers

The energy analyst returns! One of Slope's readers, a very experienced energy analyst, has been kind enough to once again pen a guest column. As before, if you'd like me to forward a note or simply your email to the Energy Analyst, just drop me a line. Enjoy!

The post on oil received several interesting follow-up questions, which I will briefly address. The first question was on the concept of peak oil. This is a fascinating topic and I have spent several years researching the topic with some of the key proponents. My own view is that the world is not at peak oil yet, but the roof is not that far away, perhaps only 5 ? 10 million barrels per day (b/d) of additional output from an all-in base of approximately 85 million b/d. This is not a lot of up-side. Moreover, the cost of extracting these incremental barrels has sky-rocketed due to a host of constraints including land, skilled labor and materials, all the classic economic inputs, and it takes time to develop these massive projects.  For example, the current cost for expansion of Canadian oil sands is projected to be over $125,000 per barrel of daily capacity and can take 5-7 years from start to finish. The only plentiful input is money, but money can?t change time or geology and it can easily be wasted on the wrong projects. It is safe to say that the era of ?cheap? oil is over.

The central problem the world faces is that demand growth is out-stripping supply growth. For decades this was not a problem as there was significant spare capacity. It is clear that demand crossed the supply equilibrium several years ago. If new supply is not the answer, then the only solution to high oil prices is demand destruction. Unfortunately, the price required to kill global consumption may be even higher than $120. So far, only US demand has shown any weakness. The rest of the world continues to consume more oil y/y, and it?s not just China. Even at $100 plus oil, I project global demand will be up another 1 million b/d this year. Part of the problem is that as US consumption moderates, demand in the Middle East has soared. Makes sense given the financial flow. Moreover, almost all emerging economies (China, India, Mexico, Middle East, Russia, Asia) actually subsidize energy prices. Therefore, there is a greatly delayed global consumer response to higher prices ? the market feed-back mechanism is broken.

If the rest of the world does not cut oil consumption because retail prices are artificially low, then it will be up to the US consumer to cutback because this is the only large market with real-time prices. Ironically, it could take a huge oil price for the US to cut enough demand to off-set growth in the rest of the world ? we might have to experience a lot of pain. Think airlines and truckers. Note that we have provided China with $2 Trillion in US dollar reserves to subsidize low oil prices in that country. So it?s more complex than just a simple emerging market secular demand growth story, which is pretty powerful in itself. I can safely predict that world oil demand would go down if retail prices actually went up, but it is not happening right now. I can also safely predict that China will not raise the price of diesel fuel in that country before the Summer Olympics. Even then, increases will be halting as social harmony is more important in China than is the cost of fuel subsidies. Unfortunately, I think the US consumer will crack before the Chinese government.

One writer suggested that ?something else was going on in the oil market? and, that perhaps a potential issue with Iran was the answer. All I can say, is that there are multiple aspects to the problem ?it is not a ?single?, convenient issue that can be addressed and it all goes away. The market has tried the single answer explanation (inventory levels, hurricanes, Iran, dollar etc) and none of them have worked.  Interestingly, global oil inventories do not reflect evidence of hoarding, or preparing for a US issue with Iran. I do agree that it makes no sense for the US to continue to fill the strategic reserve, but I conclude that it is another example of one arm of the government not understanding the ramifications of its policy actions. Another example is the ethanol policy.