Two of our analysts like the energy sector … And China is showing life — despite the headlines
When two of our analysts write about an opportunity, we take note.
That’s what’s happening right now in the energy sector, so we want to put this on your radar.
Before we hear from our analysts, let’s establish some context for what’s been happening.
***U.S. crude oil prices surged last month, posting their best January performance on record
Despite these gains, oil is still in bear market territory. The chart below shows the brutal sell-off in Brent crude from October through late-December. It was a peak-to-trough decline of more than 40%. You can also see the subsequent rise that took place in January.
Experts suggest the sell-off was due to growing oversupply, weak demand signals, and traders acting on technical signals.
However, since the late-December low, oil has spiked roughly 18% — again, that’s a January record.
So, what now?
***Two of our analysts are bullish on the energy space even after such big gains
Famed investor Louis Navellier is our resident growth investing expert. Here’s what he wrote to subscribers in his February issue of Growth Investor:
…domestic stocks, especially those with increasing dividends, will remain the best bets for our money in 2019.
One area that I’m particularly interested in is domestic energy companies. For the next several quarters, the best earnings results will be from energy-related stocks, especially considering the energy boom happening here in the U.S.
The U.S. is now producing 11.8 million barrels of crude oil per day. That’s more than Russia and Saudi Arabia. And it’s not showing any signs of slowing down: U.S. crude oil production is expected to expand by another 1.1 million barrels per day in 2019. So, by the end of the year, domestic crude oil production could be near 13 million barrels per day.
Neil George focuses on income investments through his Profitable Investing newsletter. Neil also just wrote about opportunities in oil in his February issue:
The petroleum market has also been a volatile and unsettled market. On the supply front, the Organization of Petroleum Exporting Countries (OPEC) plus Russia came to an agreement on cutbacks in production. This was initially met with skepticism, but was proven out by shipping reports confirming compliance with cutbacks, particularly from Saudi Arabia. U.S. West Texas Intermediate crude has since rebounded by 22.06% to a current $51.91, with global Brent rallying by similar gains to a current $60.46.
Supply and demand on a global scale is still favoring pricing for crude to have some support near current prices. In addition, U.S. production thanks to technological developments, has hit new highs again. This means that many U.S. producers that learned how to drive down their lift costs for crude in prior years may well be profitable even at lower crude prices, particularly in areas such as the Permian Basin where there are pipeline constraints.
Beyond the larger macro issues Louis and Neil point out, U.S. oil prices are currently benefitting from the U.S. imposed sanctions on Petróleos de Venezuela SA that came last Monday. Petróleos is Venezuela’s state-owned oil giant. On this news, Neil writes:
The one tailwind on the flip-side of Venezuela is for crude oil. U.S. sanctions mean Venezuelan crude will not be flowing to the U.S. This is good news for crude oil. U.S. West Texas Intermediate (WTI) is sitting nicely at $53.44. This is helpful for U.S. petroleum companies …
One of Neil’s suggested ways to play energy is XLE — the SPDR Energy Select Sector ETF. It’s one of the largest and most liquid energy ETFs in the world. Back to Neil:
Meanwhile, our overall up, down and midstream synthetic holding in the Energy Select SPDR ETF (XLE) has the benefit of exposing us to the profitability of the midstream pipelines and the refiners as well as the producers. I continue to see value across this industry, which is capitalizing on the improvement in natural gas particularly in the liquified natural gas (LNG) market.
In the chart below, you can see XLE rallying off its December lows, trading sideways for the second half of January, then beginning to push higher over the last week (notice it breaking through its 50-day moving average last week — the blue line).
Neil likes XLE under $70.
We’ll continue to update you on oil in the coming weeks. In the meantime, to learn more from Louis about his energy plays, click here. For more on the sector from Neil, click here.
***Meanwhile, another trading opportunity is setting up for investors who are comfortable with more risk
After taking a beating in 2018, it looks like Chinese stocks have carved out a bottom.
Below is the two-year chart for FXI. That’s the iShares China Large-Cap ETF, the largest Chinese equity ETF in the world. You can see how FXI had a great run in 2017. But starting in February of last year, things went south. From its early 2018 highs to its low this past January, FXI fell roughly 30%.
You might look at this chart and think “This looks awful. And what about all the negative headlines I see about slowing growth in China?”
Fair enough. But a few things to consider …
When a sector or country suffers a major selloff but then stabilizes like China did in 2018, it goes a long way towards “de-risking” a long position. In other words, the sector or country is much less likely to experience additional, major declines at that point.
The reason is simple — most everyone who was going to sell has already sold. And now, the bad news and negative expectations are baked into the share price.
Want to see what this actually looks like?
Below is FXI’s chart over the last 30 days. Its trend is obviously higher without any major drawdowns. Specifically, FXI is up over 10% in 2019 at the time of this writing.
Now, what has the financial media been reporting about China during this time?
Here are some of the headlines — all of which have come in the last 30 days:
· China’s Annual Economic Growth Rate Is Slowest Since 1990
· China Slowdown Hits Growth Around the Globe
· Another Number Paints a Bleak Picture of Manufacturing in China
· Factory Activity Shrinks Across Asia as Cooling China Threatens Global Growth
· Chinese Factories Have Worst Result Since 2016, Caixin PMI Shows
· How Badly Is China’s Economy Doing? Look Behind the Official GDP Figures
· China Stocks Aren’t Having a Happy New Year
When a sector or country can climb 10% in a month, in the face of gloom-and-doom headlines such as those above, it points toward one takeaway — the sellers are exhausted. And that creates the type of risk/reward trade set-up that we like to see.
As always, our number-one priority when trading is safety. So, what we look for is a clear end to the falling price action, a sideways pattern as the market catches its breath, then a break out to a new short-term price high.
That’s exactly what we see with FXI. Look again — notice the break in the downtrend (red line), followed by the temporary sideways action (yellow line), and then the short-term breakout to new, recent highs.
If you’re interested in initiating a trade, you could look to FXI, or KBA (the KraneShares Bosera MSCI China A Share ETF). But remember, this trade comes with risk. If negotiations between Washington and Beijing breakdown, we’d likely see some pullback from Chinese stocks. And of course, any sort of unexpected, macro headline could affect the Chinese market.
Given this, we advise using a relatively tight stop-loss. That would offer you a limited downside/ substantial upside trade set-up.
Overall, we love to see this pattern of “down big, hated, formed a base, and now breaking out to the upside.” It’s one of the best trading set-ups you can hope for.
Have a good evening,
Jeff Remsburg
