The Oil Dipstick Indicator! (XLE)

Had a friend in college who dreamed of a single course that she could register for, attend and exit from with everything she needed for her future.

She imagined it would be called The Answer, and that it wouldn’t require much more than a lecture or two to give over – after which, of course, the well-equipped coed would be ready to confidently face the world and overcome any obstacle that stood in her way.

Not bad, eh?

‘The Answer’.

answer

Such Nice Teeth.

 

Alas, for the lassie, there was no such offering.

But maybe we can extend her something just as valuable.

In lieu of a college course, we’d like to offer up something of an ‘answer’ to the question of how best to survive an economic catastrophe. Because it’s looking more and more like that’s exactly what we’ll be facing before long.

And it goes like this –

Turn your cellphones off, dammit!

 

There are two failsafe investments to own when the world economy goes to hell.

They’re businesses that have proven themselves over the fullness of time and across every time zone and culture.

And they are…

nolife

#1. A working farm

Folks who can produce food for themselves (and have enough left over to sell to their neighbors) can weather almost any economic storm they encounter.

Yup.

Farmland.

It certainly helps if you can extract the vittles from the cold, dark earth yourself, but failing that, there are other ways of successfully profiting from pure land ownership.

• One is leasing to more experienced, local hands.
• Another is sharecropping, or some creative variation thereof.
• And the third, of course, is old-fashioned slavery – though it’s generally frowned upon outside China and a few less-than-savory east African countries.

bondage

#2. A general store

The second business that’s a go in a general economic downturn is a store that sells staples.

This is a business that can’t be kept down. Stock it with soap and other basic toiletries, canned goods and whatever the hell else the locals desire, and you have a winner. The key is to keep it cheap and listen to the people. Developing suppliers that can be relied upon, too, is essential.

So there you have it.

takeday

What’s goin’ down, Doc?

 

We’re going to turn our attention now to the oil market, a sector that we’ve had our eye on for some time due to the increasingly volatile moves emanating from that quarter.

Recap:

Crude oil topped out in late June and has been gathering downside momentum ever since – particularly over the last two weeks.

Here’s her chart –

crudeoil

We’ve suggested that the end of the oil slide is imminent, and we continue to hold that position, particularly in light of open interest statistics that appeared at the end of last week.

Crude contracts are now showing a steep decline in the number of long bets as a percentage of open interest. That is, both the OI number is contracting as are the number of long bets being placed as a function of OI, a development that speaks to a strengthening of the oil market.

Take a peek –

ice

The data here is clear – we have a record low number of bulls for the series, a contrarian development that points toward an end to the latest round of selling.

Why the steep drop to begin with?

 

Glad you asked.

There’s rumors that a deal may have been struck to smack the Russians in the dada for being so Czarist in their behavior toward their fellow slavs in Ukraine. The deal itself appears to have been a tit-for-tat that sees a) the Saudis dramatically dropping their per barrel price for oil in an effort to ‘secure a broader customer base’ (while at the same time placing a wham-doggy tariff of a loin-kick to Russian oil revenues), for which they would receive, in turn, b) a commitment from the U.S. to bomb the targets of their (the Saudis’) choice in Syria/Iraq/IsisCaliphateVille.

And we can see the thing.

It makes sense from both an economic and macro-diplomatic perspective, and certainly the Russians have already begun to suffer the results of the deal.

But the oil markets are beyond the realm of one or two nations to control, and after the declines we’ve seen of late, we’ve a hunch that a snap-back rally is now in order – even if it’s short lived.

We also believe the best way to play it is not with crude oil itself, but with the commercials, the biggest players in the oil sector, whose stocks have been driven deep into the earth’s crust with all the recent selling in the energy domain.

This is the Select Sector SPDR Energy ETF for the last six months –

xle

After a precipitous decline that saw volume climb to six times its average daily level (in black) and RSI sink below the deeply oversold 20 threshold (red circle), we see a bounce in the offing.

But before we get to the details of the trade, a quick word on oil, the stock market and the relationship that pertains between the two.

As we pointed out back in August, in a letter called Where Will Oil Lead Us?, oil has a history of leading the broad market lower, and in 2008 it did exactly that, to the tune of a 50% retracement.

The chart that we produced in that letter clearly illustrates the leading position oil assumes in the oil/equity relationship, and we warned that we saw both oil and the broad market receding in the months ahead precisely because of that relationship.

Specifically, we said –

“In short, things could get very sticky for oil investors over the near term… As for equity investors, as we mentioned above, the downturn in oil could also signal the long anticipated stock correction that’s been worrying investors for nearly 30 months now…. the likelihood we’ve hit a major market top is remote. Rather, it’s more likely that the current bout of selling will be limited in both scope and duration, though it may induce some nausea among an investment crowd that hasn’t seen a sizeable pullback for three years.”

Feeling nauseous?

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Look for a coming bounce higher in oil to act as an anti-emetic, quelling the latest swoon in the stock market.

And play it like this –

Wall Street Elite recommends you consider Buying the XLE November 87 CALL for $1.69 and selling the XLE November 91 CALL for $0.47. Total debit on the trade is $1.22.

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With kind regards,

Hugh L. O’Haynew, Senior Analyst, Normandy Research

See what people are saying...

  1. Michael

    Did you guys forget to mention the details of the trade, or…?

    Thx.

  2. Abdullah Alhajri

    I am not in comments period, let me be get rich first , then I can comment .

    thank you

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