Is it too late to buy?
As mentioned in recent posts, the market does look prime for a reasonable rally into the early winter. However, I have also pointed out the short termed overbought situation as illustrated by Stochastics (this indicator has gone flat while the markets moved up last week). It’s not surprising to see a little bit of weakness today that may extend later into this week. I’ve been asked by a few people lately if its “too late to buy”. My answer to that is, upon a dip into the 1250 area on the S&P 500, I think we are safe to buy for a winter rally. My target, as mentioned in prior posts, is only about 1300-ish for the S&P 500. That doesn’t give it much legroom to grow on a broad market basis. However, there are certain sectors mentioned in my last two posts that are likely to be outperformers. For that reason, last week I sold a U.S. broad-market ETF representing the S & P 500, and am using those proceeds along with the 20% + cash position that I’ve held to rotate into my favorite sectors. If the market pulls back a bit more this week, that will be my entry point for these sectors.
Energy sector: crude vs. equities
This week I’d like to focus a bit on the energy sector—below are 2 charts. One for WTI oil, the other for the i-Shares ETF (XEG-T) that I hold a personal and managed portfolio position in. Oil went through the 50 day moving average (blue line) and is testing its 200 day moving average(red line). The big traders watch this kind of stuff, so it should be bullish for oil – especially if the 200 day MA is broken. It also broke its down trendline (thick green line).
You will see that I have drawn horizontal lines here- I’ll try to walk you through them. Next stop on the upside is old support at $95-ish—recall that I mentioned the current target for WTI at around this level in a prior comment. We’re almost there right now. A break of that level could bring oil to $103. So, crude oil looks pretty good technically, although seasonally it shouldn’t move until the new year according to seasonal experts Don Vialoux (www.dvtechtalk.com) and Brooke Thackray. Despite the negative seasonal influences—oil is moving well lately. My explanation : oil is a market leader and a major indicator for economic growth. If you believe as I do that the market will be reasonably strong for the coming months – energy will likely be a good performer. Having said that – if I am correct about the good times ending in early 2012, I would suggest that oil will not be something to hold past the end of its seasonal cycle in the spring, if not earlier.
The bottom chart is i-Shares stock ETF (XEG-TSX). The stocks haven’t caught the oil prices. They’ve broken through the 50 day MA (less significant) but haven’t touched the 200 day MA. As the chart shows, the index of oil stocks hasn’t yet broken the down trend. But it likely will. My reason for thinking this is that, given the oil commodity chart—oil stocks should soon play catch-up.