Two contrarian plays

Criticize the Americans all you wish, but the fact remains that their market has remained the strongest in the world, both before and after their world-leading recovery from the financial crises. While not without its faults, the US economy, as demonstrated by the  S&P500’s dramatic rise – shows us the value of investing in and conducting business with a capitalistically inclined nation.

socialismillustratedCartoon: www.mikelester.com

 

Greece’s ongoing problems and refusal to own up to their past errors is illustrated just as clearly in their index chart, below. Political idealists who criticize honestly derived wealth accumulation in our society may wish to examine the situation throughout much of Europe. Unearned benefits, unchecked spending, and over taxation of the most productive members of society to pay for those “entitlements” has driven an underground economy throughout the troubled European nations.

Ontario may be  learning some of these same lessons right now via the S&P’s recent debt downgrade – this on the back of its recent past financial underperformance along with current and future spending plans (ask former and current Premier’s McGuinty and Wynn where that money went…). Ok, enough of the political rant.

greece

 

As a contrarian, I am always interested in discovering deep value turnaround plays. Technically, one can identify these opportunities through successful base breakouts – I’ve discussed these formations throughout this blog, and in my book Sideways. The Athens index chart shows no sign of basing action, which is the minimum an investor should look for when trying to find unappreciated value. A prevailing downtrend (lower highs and lows) that remains below its 200 day MA provides no clues yet of a true base. Contrarians will want to avoid this index or its mirrored ETF’s (such as GREK-US)  until the last high of around 850 on the index is taken out.  A positive move through the 200 day MA wouldn’t hurt either. My thoughts are that there will still be better fish to fry – even in the event of such a breakout. Oil, as discussed below, may soon become such a fish.

 

Oil may be a better contrarian play

oil short

WTI crude broke down from its “handle” formation recently. On prior blogs, I accurately called the sideways consolidation that took place after putting in the double bottom early this year. That consolidation has been wiped out.

Where will support come in now that that handle formation has cracked? The chart above shows the next level of support on spot crude – it looks to be coming in around $50. Iran, Greece, the USD amongst specific oil-related  factors are putting the hurt to commodities right now. My thoughts are that $50 may hold, but I don’t want to place a trade on this potential until a bounce over at least a few days occurs. Crude remains below its 200 day MA, despite the obvious signs of basing over the past few months. Some energy-specific factors capping crude right now include the unexpected build in US crude stocks last week, the first increase in the US oil rig count in 30 weeks, reports of growing OPEC production notably out of Iraq and Saudi Arabia, and the threat of a resolution to the Iranian nuclear situation which could lead to higher volumes of Iranian crude hitting global oil markets at some point over the next 12 months.

 

 

Seasonality suggests a buy point comes in on crude at the end of July. To quote Jason Goepfert of www.sentimentrader.com:

 

“On the bright side, the commodity is entering what has typically been a strong time of the year. Over the

past 35 years, when crude lost 7% or more on any day in June, July or August, the next two

months showed a positive return 7 out of 7 times, averaging +30%. Remarkably, its worst

loss during the next two months averaged only -1.6% while its maximum gain averaged a

monstrous +49%. The dates were 23-Jun-1986, 22-Jul-1986, 8-Aug-1990, 27-Aug-1990,

29-Aug-1990, 15-Jun-1998 and 21-Jul-2000.”

 

My recommended trading strategy on WTI oil is simple:

Wait to see if $50-ish can hold – look for positive hooks on momentum oscillators (not shown on todays chart) before considering a trade. You want to see positive support and price action for a very, very minimum of 3 trading days—preferably longer (!), before entering this trade. Having said that—there is at least a reasonable chance for some upside between July and December on crude should current levels of support hold.

Fasten your seatbelts, traders. Things are getting interesting.

 

As an aside–On occasion I have quoted occasional musicians lyrics that seem to reflect my technical or fundamental thoughts on this blog–—A few lyrics from Canadian rock legend Rush sum Greece’s situation up nicely (yes, I went to the recent Rush concert):

rush

Begging hands and bleeding hearts will Only cry out for more-Anthem

 

No, you don’t get something for nothing

You can’t have freedom for free

You won’t get wise With the sleep still in your eyes

No matter what your dream might be-Something for nothing

 

5 Comments

  • Isn t total debt as high or higher in usa (not to mention most other western nations) than Greece?

    Reply
    • Yes–Debt/capita is higher in the USA ($54K/person) vs Greece ($38k/person). But debt is not the issue–its the ability to pay it. Debt as a % of GDP is only 103% vs. 177% in Greece. Also, GDP growth is near non-existent in Greece (0.6% in 2014) vs. a relatively healthy 2.4% in the USA (2014 figures). So its like holding a mtg–if you earn $1MM/year, your $1MM mortgage might be quite sustainable for you to pay. Very different for the other guy who only has a $500k mortgage, but he/she only earns $25k per year as the fry guy at McDonalds. If you just looked at debt–the fry guy appears to be in a better position.
      Hope that helps

      Reply
  • would a mix bag of bonds and volatility indexes (vxx) fit the bill in this summer fear spike and china drop (fxi), or are we already oversold for the time being?
    j.p.

    Reply
    • I do think markets are getting oversold–especially the Chinese Shanghai index. Not to say it cant fall a little more–but there is at least a potential for a solid oversold bounce pretty soon.

      Reply
  • I just wanted to say I really apprecite all your insights and shaing all this knowledge with the general population. You are making a difference in people’s lives. The more money I make the more I give to charity to help those in need….thanks in part to you!!

    Your insights, opinions and guidance are deeply appreciated! Thank you so very much!

    Reply

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