Low Energy? Turn off the Tech (XLE)

You’ve been listening to us grunt and groan about commodities in this space for the last several weeks, about gold and gas and the folks that pull them out of the ground, and today will be no exception, save for the fact that we’re asking your forgiveness in advance for doing so.

sorry

But before we get into that discussion, we want to sidetrack and examine an issue not related to markets, per se. After all (as the Austrian economists will tell you), what’s not related to markets?

The topic we want to address has been dealt with here on a number of occasions, though not in great depth, so we want to focus on it at this time the better to prepare you for some difficult days that lie ahead.

And it goes like this –

Dear friends…

 

The world today is descending toward a state of chaos. We use the term advisedly and not to engender any sort of panicked response from our readership.

Quite the contrary.

When we say ‘chaos’, we’re assuming that you were all raised in a civil society and not in a war zone, and that the life you’ve grown accustomed to, though possessing certain risks and dangers, is still more or less ordered and free from the random violence and madness that we envisage coming.

Because in our view, it won’t be long before a general hysteria sweeps the nation – along with the rest of the developed world – that rises in pitch and fever exactly in line with the rise in markets that we also envision, and that creates a reality unlike anything we’ve come to know in our lifetimes.

The most obvious aspect of this reality will be the growing number of untreated (and perhaps untreatable) cases of mental illness, despair, anxiety, depression and the lethal combination that any of these afflictions induce when taken together.

We also see the malady crossing all socio-economic lines, age, gender, race, and political orientation, though it’s likely that some demographics will fare better than others.

girlface

In short, we have every reason to believe that a general hysteria is on its way, that it may cause in many locales a breakdown of the civil order, and that everyone is susceptible to both that hysteria and the resultant collateral damage it triggers.

As to why we believe this will be, we have a great number of sources, but for reasons of space we’re not going to delve into them at this time. But we’ll get there. Let the wise understand.

What is Important

 

It’s far more useful at this stage, we believe, to assist you in avoiding succumbing to the panic when it arrives, and equally, to shield you from its potentially uncontrolled wrath.

So listen carefully.

The road to safety and health, dear friends, runs through a silent valley that has no internet, no television or radio, no newspapers or smartphones. It’s a road of almost complete silence that asks you to turn off your iPad and pull out your earpiece and just go talk to your kids.

Read them a story.

Turn off. Tune out. And return to that human existence you once had – fleetingly – as a kid. When people still sat the table and spoke to one another – and not to their friends via text.

Drop the technology.

If you want to stay sane.

Nuff said.

How Low Will Energy Stocks Go?

 

As the price of oil has declined over the last 100-days, so, too, has the price of the major marketers, drillers and service outfits. And in the instance of many of these corporations, we’ve seen justiciable cases of whiplash.

Take a look at the chart –


xle

This is the Select Sector SPDR Energy ETF (NYSE:XLE) for the last six months. It’s the biggest of the energy ETFs, trading close to a billion dollars a day, so it’s a worthy proxy of the sector as a whole.

As to the action, we have a drop of some 14% that brought the stock to its long term moving average last week with good volume. In the process, XLE dropped from an extreme overbought reading at its June highs to very close to extreme oversold today (in blue, at bottom).

The technicals are classic here, and indicate an end of some nature (short- or medium-term) to the decline.

Look also at the breadth indicators for the sector, pictured below.

The first indicates how far above or below the 50 day moving average the sector is trending (white line is the 50 DMA). As you can see the 50 DMA is trending lower and the sector is over two full standard deviations below that! Normally that’s indicative of a significant bounce in the offing.

busted

The lower chart tells how many stocks in the sector are trading above their 50 day moving averages.

Energy?

None here.

The wise amongst you will consider a slightly out-of-the-money speculative CALL on XLE with lots of time to expiry.

Many happy returns,

Matt McAbby, Senior Analyst, Normandy Research

See what people are saying...

  1. Philip Henry

    I think the idea is premature.

  2. john

    I like it, I am long some drillers and getting sacked. No margin big dividend. The only question in the options play is volatility. will it damage the long dated calls. Crazy stuff.

  3. Ron Coleman

    I bought Nov 92 calls today, but I’m not sure that’s enough time.

  4. Michael

    Implied volatility is at 100% of it’s value over the last year. Is it wise to buy an option when they are so expensive. Wouldn’t it make more sense to sell a put or put spread? Also I agree that the future will get unstable as our empire forges ahead toward it’s well deserved destruction and the population’s addiction to Big Pharma’s life shortening drugs will only increase the mass hysteria from the drug addled population.

  5. Mark

    Fighting the tape. I agree with Mr. Henry.

  6. Rod

    XLE looks extended to the downside on the weekly, and with high volume; I agree this suggests there may be a reversal towards the mean. However, the monthly chart shows XLE still well above the 100 SMA, suggesting we could get a flush lower again before a strong rally. Also, the current pull back is greater than any previous back to 2010. If we are to see symmetry with that previous retracement then XLE could fall to about $76 before it heads back up. Finally, a .618 retracement from the 2010 high would bring XLE back to $73. If XLE falls to the base of the current upward channel it might come down to around $79. I shall put in a GTC order to buy some June 2015 ATM calls on a fall to $80.

  7. Stephen

    A speculative call on (XLE)?
    Just think about it, words like “January”, and “February?”. And, “snow”…