OIL HIGHER (USO,XLV,XLU)

There’s a lot to say and a trade to close, so let’s get right to it.

 

In the first place, the country is angry.  And nothing makes Americans angry like the thought of some privileged elite that arrogates to itself the right to decide things for them.  The original British colony, you’ll recall, was ousted on its keyster and left to fester like a busted oyster.  And for what?  Arrogance.  Thinking they had a right to determine things from afar.

 

Well, it’s clear today that Washington is the new London, and the self-proclaimed kings of Capitol Hill are neither wanted nor welcome, if the latest presidential primaries have anything to say on the matter.

 

A New World Dawning

 

America is about to change in ways no one can imagine.  And a great deal of that change is going to be less than pleasant.  And it’s also going to affect the markets and your money.

 

But before we get there, we still have one final, stomach-churning rocket ride higher, and it’s going to be juiced by the following factors:

 

  1. Short Covering – there’s a massive short interest out there, and it only seems to grow as we near the former highs. Those highs get taken out, and woe betide the lads and lassies who have to cover.  The size and pace of the surge that ensues will knock everyone’s socks off.  It’s an inevitability.
  2. Earnings – after months of fretting that a corporate cave-in was in process and analyst downgrades accelerated to their worst rate in half a decade (see below), earnings beats are actually coming in better than average.

Earnings chart

We contend that due to diminished expectations, the number of ‘beats’ will come in on the high side, giving everyone a reason, albeit weak, to continue the buying.  That’s the way Wall Street operates.  Facades.  Sleights of hand.

  1. Market Breadth – coming off the February lows, market internals bounced higher with a vengeance, and point toward continued gains over the near term. Of course, with a short interest position like the one described above, all it takes is a little near term strength… then the short covering takes over.

The chart below illustrates just how broadly based the latest rise was.  Only six times in the last six years have we seen such a broad push northward.

burgeoning breath chart

  1. Central Banks – they’re powerful, and they’re dedicated to inflating the market. And while we have no direct knowledge of what went down in Barack’s recent meeting with Fed Chair Janet, we do know that the last thing a sitting president wants is to go out on a sour note.  That leads us to believe that B– told J– that the market must not collapse while he’s sleeping on Pennsylvania Avenue … lest there be consequences.

warrior

There’s little doubt that dammit Janet complied and no effort will be spared to spare the lame duck his last few months of high profile golf.

  1. Cash Levels – there’s simply an unprecedented amount of cash in the investment arena that hasn’t been put to work, and that includes fund money, Main Street money and corporate money, the last of which has been increasingly funneled into buybacks.

The buybacks stopped momentarily at the beginning of the year, but look now to be picking up speed again.

  1. Dog Poop Sentiment – finally, no one cares for equities. Main Street fear levels are as bad as they’ve been for the last six years and the worry is palpable amongst the investment ‘elite’, too, that we’re about to turn .  All of which means, this ain’t no top.  Tops don’t happen when everyone is scared to death that we’ve reached a top.

 

A Rise in the Waiting

 

We’ve a hunch that the last bullish blast of this greatest of all bull markets will come as the road to the White House narrows and a single individual emerges as frontrunner.

 

And it’s going to be a war.  As candidates are selected and the battle for hearts and minds is waged, the decibel level across the news media will ramp up like a Manowar concert circa 1984.  And quietly, stealthily, the market will tiptoe toward a summit.

 

A wild brawl on the airwaves and internet will provide the perfect cover for Dow 20,000.

black white

Close ‘em down!

 

We’re going to close a trade today that has worked out very well for us.

 

Just two weeks ago, in a letter called What’s Tech Fish?, we opened a trade that pitted the Utilities Select Sector SPDR (NYSE:XLU) against the Health Care Select Sector SPDR (NYSE:XLV).   Until that time, the utilities had been outperforming by a wide margin.  But we suggested the gap was about to close.

 

We therefore recommended you buy the XLV September 73 CALL for $1.55 and sell the XLU September 49 CALL for the same $1.55.  Your cost for the trade was nil, and this is how you fared…

 

XLV CALLs are now trading for $1.97 and the XLUs for $1.24.  Sell the former and buy back the latter for a profit of $0.73 on nothing laid out.  Adjust for minimal commissions and your profit is a very fine 387%.

 

With any luck, you went in big on this one and, like our fellow Normandy scribbler, Hugh L’ O’Haynew, traded multiple pairs.

 

Today’s Trade

 

We’ve played oil recently for profits on the long side, and over the last few days, new, important technical hurdles were overcome that we believe bode singularly well for crude.  So we’re diving back in with another buy recommendation, again using the United States Oil Fund (NYSE:USO).

 

Have a look at the chart –

uso

  • Since the oversold RSI read in mid-January (red circle) we’ve had positive divergence against price, a very positive development (green).
  • In addition, we’ve seen a massive surge in average daily volumes (black square), a sign that USO shares have been moving into stronger hands.
  • As of yesterday’s trade, we also have a breakout above seven week resistance and the 137 day moving average, a level we view as key.

 

We could see an easy 20% climb from here toward the declining 274 day moving average, now at $14 (in orange).

This recommendation is for members only…

Our recommendations have yielded over 1,247.91% since 2011. Cancel any time – manage your own membership…

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Options Trader Elite therefore recommends you consider buying the USO July 11.50 CALL for $0.70 and selling the USO July 11.00 PUT for $0.76.  Total credit on the trade is $0.06.

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Many happy returns,

 

Matt McAbby

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