Tuesday, July 3, 2012
You remember how the gold sector was set up last month, right? The sector was brutally oversold. Many gold stocks were trading at valuation levels we hadn't seen in years. They were lagging way behind the action in the metal. And even the most die-hard gold bugs were giving up on the mining stocks.
Now, of course, we know last month was an ideal time to buy gold shares. (My S&A Short Report subscribers booked a 112% gain on major gold producer Seabridge Gold in just two days.)
So the question is... If you had the chance to buy into that setup again, would you do it?
It looks like we're going to have that chance in the oil sector.
Oil stocks look like death. The AMEX oil index is down 10% in the past two months. It's down almost 20% since March. Oil services giants like Halliburton (HAL) and Baker Hughes (BHI) are trading at less than 10 times earnings. It's hard to find any analyst, anywhere, who'll say something good about the sector.
And as we saw with gold stocks last month, the bullish percent index for the oil sector (BPENER) has just whipsawed into, out of, and back into a buy signal.
Take a look...
Remember... a bullish percent index (BPI) measures the percentage of stocks in a sector that are trading with bullish point-and-figure chart patterns. A BPI is typically overbought when it rallies above 80, and it's oversold when it drops below 30.
Buy signals occur when a BPI drops into oversold territory (below 30) and then turns higher.
The red circles on the chart above represent buy signals. As you can see, BPENER triggered a buy signal in late May. But that signal reversed – similar to what happened to gold stocks in early May – and BPENER dropped to a lower low.
We got a second buy signal earlier this month.
This is nearly identical to the action we saw in the gold sector bullish percent index last month. In fact, the whole setup is nearly identical.
The only problem is that this latest buy signal reversed as well. But I'm watching this for another turn higher to signal a good time to buy.
Oil stocks are brutally oversold. They're trading at dirt-cheap valuations we haven't seen in years. Sentiment toward the sector is bearish.
This may not be the absolute bottom for the oil sector. But we're close to at least a short-term bounce.
The Hera Research Newsletter is pleased to present the following insightful interview with John Embry, Chief Investment Strategist of Sprott Asset Management LP, where he plays an instrumental role in the corporate and investment policy of the firm. Mr. Embry, who is a world renowned expert on the gold market and on gold and precious metals mining shares, currently focuses on the Sprott Gold and Precious Minerals Fund. Mr. Embry has researched the gold sector since 1963 and has more than thirty years of industry experience as a portfolio management specialist.
After graduating from the University of Manitoba with a Bachelor of Commerce degree, Mr. Embry began his investment career as a stock selection analyst and Portfolio Manager at Great West Life, where he later became Vice President of Pension Investments for the entire firm. After 23 years with the company, he became a Partner in United Bond and Share, an investment counseling firm acquired by Royal Bank in 1987.
At Royal Bank, Mr. Embry was named Vice-President, Equities and Portfolio Manager at RBC Global Investment Management, a $33 billion organization where he oversaw $5 billion in assets, including the flagship $2.9 billion Royal Canadian Equity Fund and the $250 million Royal Precious Metals Fund, which was the #1 ranked fund in Canada for its 2002 net performance of 153%.Hera Research Newsletter (HRN): Thank you for joining us today. Let’s talk about gold stocks.
John Embry: Gold stocks represent a tremendous value in relation to the price of gold and to the fundamentals of the sector. There has been tremendous shorting activity by hedge funds and, as a result, dedicated gold funds have experienced redemptions. Retail investors, who are natural buyers of these stocks, have been annihilated by the price action. This has created one of the finest opportunities, if not the finest opportunity, that I have ever seen.
HRN: Do you have a short term price target?
John Embry: I don’t look at short term price charts for gold. In a market as heavily interfered with as this one, charts can be made to look any way you want in the short run. As I see it, if you don’t like gold at these prices, then you must like currencies. My partner Eric Sprott often says, the U.S. dollar is the best looking horse in the glue factory. If the U.S. dollar is the world’s strongest currency, that’s the best endorsement for gold that I can think of.
HRN: Do you believe that currencies are losing value?
John Embry: The fact is that economies are slowly melting down. The problem is excessive debt in almost every corner of the world. The only way to deal with the debt is through aggressive growth, but fabricating growth through more debt won’t work. The idea that you can get the economy to move forward by creating even more debt just doesn’t wash. We can’t service the existing debt, even at artificially low interest rates. I don’t see any easy way out. We have to get the excessive debt out of the financial system. Either policy makers are going to create mounting inflation or there will be a deflationary debt collapse.
Time Warner, Inc. operates as a media and entertainment company in the United States and internationally. It operates in three segments: Networks, Film and TV Entertainment, and Publishing. The Networks segment provides domestic and international networks, premium pay and basic tier television programming services, and digital media properties, which primarily consist of brand-aligned websites. Its premium pay television services consist of the multi-channel HBO and Cinemax premium pay television services. The Film and TV Entertainment segment produces and distributes feature films, television and other programming, and videogames; distributes home video products; and licenses rights to its feature films, television programming, and characters. The Publishing segment publishes magazines and books; and operates various websites, as well as engages in marketing services and direct-marketing businesses. The company's brands include TNT, TBS, CNN, HBO, Cinemax, Warner Bros., New Line Cinema, People, Sports Illustrated, and Time. Time Warner Inc. was founded in 1985 and is headquartered in New York, New York.
To analyze Time Warner's stock for potential trading opportunities, please take a look at the 1-year chart of TWX (Time Warner, Inc.) below with my added notations:
After dropping significantly lower during the fall of last year, and then rallying higher in the winter, TWX has been traveling sideways for most of the last 5 or 6 months. During this time, the stock has repeatedly hit resistance at $38 (blue). On Friday the stock finally broke through that $38 resistance and should be heading higher overall from here.
The Tale of the Tape: TWX recently broke through its $38 resistance. A long position could be entered on a pullback to $38 with a stop placed under that $38 level. A close back below $38 would negate the forecast for a move higher.
Look for stock markets to reverse after Friday’s news-driven rally. Traders should expect large rallies like that to be at least partly reversed in the short-term. Friday’s move pushed the S&P 500 into overbought territory when looking at the one-month relative strength (RS). Over this time frame, high RS is best used to spot short trade candidates. RS measured over periods of three months to a year should be used to find long trades.
SPDR S&P 500 (SPY) has reached this overbought level 50 times since 2001. The result? A week later SPY closed lower 94% of the time. SPY was lower on the day following this signal, which will be Monday, 100% of the time. Barring more major news, we have a very high probability short trade in SPY this week. That makes ProShares Short S&P500 (SH) a buy and aggressive traders should consider ProShares UltraShort S&P500 (SDS), an ETF designed to move twice as much as the underlying index on any day.
For SPY, the critical levels to watch this week are shown in the chart below. A close above $136.45 negates the short trade. Support is at $132.99, and a break below that level could see prices retest the recent low near $127. Based on market history, SPY should break the initial support this week.
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