In less than four years, the price of oil has risen about 300%, or over $50 a barrel. The Light Crude Continuous Contract (of oil futures) hit an all-time high at $67.80 a barrel Friday, and closed the week at $67.40 a barrel. Persistently high oil prices will eventually slow economic growth, which in turn will cause oil prices to fall, ceritus paribus.
The two charts below are same period daily charts of SPX (S&P 500) and OIH (an oil ETF, which is a basket of oil stocks). Over 15% of SPX are energy & utility stocks. The two charts below show SPX started the recent rally about a month before OIH. Also, the charts imply, non-energy & utility stocks fell over the past week or so, while energy & utility stocks stayed high or rose further.
SPX held its 10 day MA until just over a week ago, while OIH continues to hold its 10 day MA. The Parabolic SARs (red dots) indicate SPX is on a sell signal, while OIH continues to maintain the buy signal. SPX would need to rise to about 1,242 3/4 to trigger a buy signal, and OIH would need to fall below 115 3/4 to trigger a sell signal (see upper left corner of chart).
Perhaps, the safe play would be to wait for OIH to close below its 10 day MA, or fall below the Parabolic SAR buy level. However, I believe, if oil tests $70 (e.g. next week or the following week), that will be the OIH sell signal, and perhaps an excellent opportunity to buy OIH Sep puts (or puts on overvalued oil stocks).
SPX has sold into weekends over the past three weeks, which is typically bear market behavior. However, next week is options expiration week. So, direction will be somewhat skewed next Friday. The following are current August Max Pain expirations: SPX 1,225 with the value of calls about three times the value of puts (which is bearish, since the put/call is a contrarian indicator). SPX closed at over 1,230 Friday. OEX (S&P 100) 570 with the value of puts over three times the value of calls (which is bullish). OEX closed at about 571 Friday. QQQQ 39 with the value of puts twice the value of calls. QQQQ closed at about 39 1/4 Friday. It's interesting that the OEX put/call is roughly the mirror image of the SPX put/call, which may suggest institutions, which tend to buy large cap stocks, are skeptical of a rising stock market.
Economic reports next week are: Mon: Empire State Index, Tue: CPI, Industrial Production, Capacity Utilization, Building Permits, and Housing Starts, Wed: PPI, Thu: Unemployment Claims, Leading Indicators, and Philadelphia Fed. Fri: None. Recent data showed slowing and above trend growth with disinflation. A higher Capacity Utilization Rate would indicate future inflation. The high price of oil tends to slow economic growth rather than cause inflation (in part, because the high price of oil is a tax on consumption, which lowers demand for non-energy goods).
The big play may be buying Sep puts when OIH and overvalued oil stocks bounce, because OIH may continue to lag SPX. Also, options expiration week tends to be volatile, and the trading range may continue. So, there may be several other excellent trading opportunities next week.
Charts available at PeakTrader.com Forum Index Market Overview section.
Arthur Albert Eckart is the founder and owner of PeakTrader. Arthur has worked for commercial banks, e.g. Wells Fargo, Banc One, and First Commerce Technologies, during the 1980s and 1990s. He has also worked for Janus Funds from 1999-00. Arthur Eckart has a BA & MA in Economics from the University of Colorado. He has worked on options portfolio optimization since 1998.
Mr Eckart has developed a comprehensive trading methodology using economics, portfolio optimization, and technical analysis to maximize return and minimize risk at the same time. This methodology has resulted in excellent returns with low risk over the past three years.
This article attempts to help give the investor a broader... Read More
Have you often wished you could have got in on... Read More
By definition, value investing is the process of selecting stocks... Read More
First, I need to explain about e-currencies or digital currencies.... Read More
Angel investors are individuals who invest in emerging business ventures.... Read More
A SEP is a special type of IRA. Under a... Read More
Based on consistent results I think Buy & Hold should... Read More
Putting Rare Coin Market Cycles to Work for You...Until recently... Read More
"All human power is a compound of time and patience!"... Read More
The practice of economy, directed toward a retirement investment plan... Read More
The following lists of questions are suggested questions to ask... Read More
How much are you willing to pay for a tank... Read More
Six or seven years ago, the stock market was booming,... Read More
Here are ten more WISDOM packed GEMS that ooffer very... Read More
A strategic question. Why indeed?1. A penny share would usually... Read More
Tropical Storm Arlene formed as a tropical depression on June... Read More
Investors are still too slowly realizing what the academics have... Read More
While it is rather rare that value gurus sell stocks... Read More
An option is a derivative trading product that is best... Read More
In the simplest of terms, Arbitrage means to exploit price... Read More
People tend to feel sorrow and grief after having made... Read More
We have all heard that slogan that started back when... Read More
If you are new to investing online, don't put your... Read More
In the last two decades, even though gold prices have... Read More
FOREX, the term for the FOReign EXchange market, is an... Read More
In 1519, Hernando Cortes, beached on the shores of unexplored... Read More
Arthur Levitt, during his tenure at the SEC, experienced many... Read More
There are several reasons people give for not investing their... Read More
Q: What have been the most successful approaches to attracting... Read More
College Savings Plans ? are they the best choice for... Read More
There maybe several reasons why you to want to invest... Read More
There is a tremendous amount of software, complicated high priced... Read More
You've probably heard about people who keep their money offshore.... Read More
CATCHING A FALLING KNIFEOne of the most common mistakes made... Read More
If you're like many people, your retirement savings have not... Read More
The economic data reported Fri showed continued above trend growth... Read More
Location ? Once the holy grail only for real estate... Read More
If you are new to investing online, don't put your... Read More
In 1519, Hernando Cortes, beached on the shores of unexplored... Read More
FOREX, the term for the FOReign EXchange market, is an... Read More
Let me start by answering that question...if an annuity fits... Read More
Have you considered buying a franchise instead of trying to... Read More
Recently, my family and I took a trip to Maine... Read More
For those accustomed to viewing things a certain way, it... Read More
Mutual Funds are considered to be one of the best... Read More
About 6 years ago I started to notice that certain... Read More
It caught my attention when I heard an analyst on... Read More
What really controls the economy? Forget interest rates, forget deficits,... Read More
The most basic aspect of trading is learning to differentiate... Read More
You have rowed a boat at some time haven't you?... Read More
In part 1 of this article I started to look... Read More
Setting Up a Paper Trading AccountQuestion: I cannot trade with... Read More
RETIREMENT PLAN CONSIDERATIONS are something every small business person needs... Read More
Let's first understand what maniac means. According to Webster a... Read More
Ever since the turn of the century, world stock markets... Read More
Here are some useful tips on investing. When you make... Read More
There maybe several reasons why you to want to invest... Read More
What are the risks?Today, investors are increasingly turning to global... Read More
You are 55 years old (or somewhere around there) and... Read More
When developing a plan for your finances, the toughest question... Read More
College Savings Plans ? are they the best choice for... Read More
For a successful retirement investment plan to work in the... Read More
Financial Spread Betting (or Trading) offers a tax free method... Read More
Grading coinsThe condition of a coin is commonly summarized by... Read More
1. How to Treat Gap Openings A gap up or... Read More
Six or seven years ago, the stock market was booming,... Read More
Investing |