Trade of the Day: Anadarko Petroleum (APC)

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My indicators have improved to neutral this week, an upgrade from last week’s extremely bearish readings, but that doesn’t say much, as the overall trend for the market is still to the downside. While most analysts’ projections put the chances of a recession at about 50% or less, I’m of the mind that there’s about a 70% chance that the U.S. economy will fall into recession again, which aligns with my bearish stance.

There are several macro- and micro-economic factors that I believe support my projection. First, the Institute for Supply Management (ISM) Manufacturing Index has posted six consecutive months of increasingly lower readings. Additionally, the ISM Purchasing Managers’ Index (PMI) is another recessionary marker that is declining, and the Producer Price Index (PPI) has also been heading south since the summer of 2015, both of which are pointing toward a recession.

Furthermore, the Empire State Manufacturing Index, a key benchmark based on the New York Fed’s monthly Empire State Manufacturing Survey, has plunged into negative territory. Rail and freight traffic volumes have been declining at a pace seen only five times previously…and, in four of those five time periods, a recession followed.

Government taxation — that is, as a percentage of gross domestic product (GDP) — is over 18%, and that points to an imminent recession as well. Also, although gas prices have fallen in step with the decline in crude-oil prices, which is a kind of a stimulus in itself, health care costs (as a result of the “Affordable” Care Act) are projected to rise more than 12% next year. That’s going to offset any savings consumers may find at the gas pump.

While oil prices staged a little rally this week, there’s still a huge amount of pressure on energy-producing countries to keep pumping because the revenues are sorely needed to support their economies. Rumors circulated on Thursday as Russia’s energy minister said that Saudi Arabia had proposed a 5% production cut by the two nations, but the subsequent rally in oil faded after an OPEC official denied the rumors.

As I have alluded to before, the weakness in the oil market is having a very real effect on the U.S. economy as a whole. No matter how low gas prices drop, they will be unable to offset the high number of people who are losing their jobs in the energy patch. A pullback in energy-equipment manufacturing and a reduction in the amount of capital being deployed toward oil exploration have also been damaging to the economy, which is another reason why I’m expecting a recession to emerge.

Even companies like U.S. Steel (X) are suffering because of a decrease in demand for the vital material used in making oil-exploration equipment.

So, while I do believe that a recession is coming, I was not surprised by the rally we’ve seen over the last few days. Like a rubber band that has been stretched too far, the equity markets are now simply snapping back from an oversold condition.

To get a better picture of the global economic weakness, we also have to be cognizant of the fact that international equities are really struggling right now. China’s stock market in particular continues to falter, with the Shanghai Composite Index shedding approximately 10% since this past Monday.

The Federal Open Market Committee (FOMC) also released its latest policy statement on Wednesday, leaving the option for another rate hike in March on the table, although I doubt that the Fed will increase interest rates again at its next meeting. Nevertheless, concern that the Fed might actually follow through with another hike was the real driver behind Wednesday’s decline…but, again, I don’t think that will happen.

Despite this bearish backdrop, however, it’s important to note that today marks the start of what is typically a bullish cycle of the last trading day of a month and the first four trading days of a new month. Normally, in these kinds of bear markets, the market will rise 50% of the time during this five-day stretch as the monthly calendar turns.

We may see some expected strength that traders can exploit with some short-term calls, but this does not mean that my outlook has changed, and I still recommend using quick rallies to buy puts and open other bearish strategies at a discount.

Today’s stock is a great example. It’s up solidly as I write, but I think there is still more weakness ahead to exploit in oil-related issues.

Buy to open the Anadarko Petroleum (APC) May 27.50 Puts (APC160520P00027500) at $1.45 or lower.

After entry, take profits if APC hits $31.30 or the option price hits $2.80. Exit if the stock price closes above $40.20.

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