The Sell in May situation could arrive right on time this year, according to Roger Wiegand of Trader Tracks, who anticipates that all the economic machinations of the last year could create not only inflation, but potentially hyperinflation. In this exclusive interview with The Energy Report, Roger suggests some alternate market plays for the lean summer months and explains why he believes the prices of oil and gas are going to get very interesting if we have hyperinflation and low oil production and shortages.
The Energy Report: Roger, last week in your newsletter you talked about seeing two flying wedges in the Dow in the technical charts. Do these wedges have anything to do with the proverbial Sell in May and go away?
Roger Wiegand: Those two little wedges can be either continuation triangles, which go straight sideways, or they can be bull flags, which occur when the end of the pennant points in an upward direction. As I recall, the two wedges we saw were pretty much straight sideways.
The NASDAQ, S&P 100, and S&P 500, and other related indicators all signaled stocks were in a bull situation, and they should continue to rise in price. Then they peaked and prices reversed a little bit. We saw one of these wedge-shaped patterns fully complete itself rather quickly. It took only a few days for the cycle and I expected prices to either rally again immediately or, fall. Price sold a little but instead of continuing to sell, it began to trade sideways in another new wedge. This is a highly unusual chart pattern signaling price manipulation, in my opinion.
That event told me we have a technical continuation of the first wedge. In other words, the chart is levitating and prices are peaking. The price seems that it wants to sell, but I suspect there's manipulative buying holding it up. Now another thing that happened in the middle of the second wedge last week was the announcement of those bank stress tests, which in my view were just a lot of public relations. Looking forward, there are key pivot dates during the last ten days of May, starting roughly around May 20. We suspect from that date forward, toward the end of May, we'll encounter our Sell in May cycle situation. So, after all the machinations and moving around on these prices and the Obama Bounce being delayed and so on, it now appears there's a chance the Sell in May cycle could arrive right on time. Apparently, Mr. Market will not be denied.
TER: You said earlier that you're expecting a Dow rise in the early fall, but a major selling event in September?
RW: Yes, we are looking for a rally in the fall. Right around the first two weeks of September we could see fresh buying for Dow and index shares. Investors and traders return to work after Labor Day and vacations. Usually on that cycle they begin to buy. Unless there's some really bad news we can't forecast out there right now, I suspect the first few days of this could be quite strong right after Labor Day. However, during the last week of September, moving into October, I believe we're in for a major selling event. That one could be a real attention-getter.
TER: How far do you think it will drop at that point? Will it be testing our 2008 lows?
RW: I suspect we could go back as far as Dow 6,500 or 5,600. That's probably the worst case for the fall. In my view, the deck is stacked for years against the stock market and I would be very cautious and expect hard selling at the end of September or, into the first two weeks of October. Somewhere forward in time we see Dow 3,000 or 4,000.
TER: What are you suggesting investors do between now and September? Is there a way to play the market before it takes its trip down?
RW: I think there is. From a trader's viewpoint, if, in fact, we're correct on the Sell in May event, you could purchase June put options on the S&Ps or, you can trade the S&P mini futures short. We're planning to trade the S&P mini futures short and we'll price-out those S&P options. Those two trades, held during a quickly falling stocks' sell-off, could earn quite a bit of money in a short period of time. We also recommend some ETF's shorting the financials and stock markets.
TER: Let's talk energy. What's your take on pricing these days?
RW: Oil is trading in the range of $56 to $60. Probably in the next week or two we're going to have a top in oil temporarily. Follow-on trading might take oil to our annual forecast high for crude oil to $80. Previously we did forecast $70, but a few weeks ago we told our readers the higher price of $80 appeared correct on revised technicals. Since that time, we've seen three other institutions make similar technical forecasts.
TER: When will oil go up to $80? What's driving that?
RW: I think you'll see it in the fall. Several in the oil trade right now have done well from $34 to $55 to $60 but it's getting kind of peaky at this date of May 20, 2009. I think we're due for a sell, but it shouldn't be too dramatic. Worst case, we could go back to $50 and then turn around and rise again. The key crude oil supports and trading ranges are $48.50 to $52.50 and $54.50 to $56.50. There is support and resistance on oil at $56, $60, $65, $70, and then at $80. Those are the key points.
One thing happening in oil to reinforce prices this year is the rapid depletion of the Mexican Cantarell field, which is expected to go dry by the end of the year. They've been providing 10% of the U.S. imported crude oil for our refineries in the Gulf of Mexico. That's an important event. Another event on the horizon is the Canadian energy industry is number one in production for the United States, not the Middle East, which a lot of people don't realize. Canada might supply 10% less natural gas and oil to the U.S. this year. Primarily, this is because Canada needs more product for domestic tar sands production expansion and other applications. I think that's an interesting number - 10% less. That could have quite an effect.
TER: What's your take on some of the renewable energy options?
RW: It's quite popular to get caught-up in renewable energy like solar and wind. While I like them and they can offer good things; as far as investing, I'm not going to recommend them. Green energy is only 2% to 3% of the entire long-range energy production program. Those stocks, in my view, are risky, although some of them have done exceedingly well. I'm not saying they're bad stocks. I'm just saying they're going to be difficult to trade. And with the credit problems out there, despite the Obama administration pushing renewable energy, I suspect traders and investors had better be very, very careful. These ideas are going to take 25 years or more to prove effective and then their output is so tiny compared to the bigger picture. Nearly 60% of US energy production is delivered through natural gas and crude oil. Another larger portion is coal. These fuels will dominate for decades. The Greens are merely a fly on an elephant.
There are two new proposed natural gas pipelines delivering fuel from the North Slope of Alaska for expansion of tar sands production, remanufacture into LNG at seaports and distribution into the Midwestern United States natural gas supply system. These are probably ten years from delivering fuel. Two new, major natural gas fields were just discovered in Louisiana, which should help keep a lid on rising natural gas prices. The newer Bakkan tar sands fields in the U.S. Dakotas are being explored but this mammoth field is ten years away and must use huge amounts of natural gas for production.
Nuclear is, from my point of view, one of the best ways to go because it provides a lot of continuous clean power, it's solid and non-polluting. However, it takes billions of dollars and a long time to develop one new plant. There are 15 or 20 old nuclear power plants in the U.S. that must be de-commissioned because they're just too old and worn out. I don't know whether they're going to rebuild them or, just decommission the plants and close them down. We're a good 10 to 15 years away from any number of new nuclear power plants of any dimension. By that I'm saying 10 or 20 of them. There might be two or three or four, maybe five in various stages of construction or planning right now, but these things just take forever and they cost billions of dollars to build.
The other unsettled question is regarding nuclear power plant waste. It was supposed to be buried in the Yucca Mountain storage facility in Nevada and Harry Reid, who is a Nevada senator, blocked it. So what they're going to do with the continuing piling-up of nuclear waste will be a difficult question. Finland built a brand new nuclear plant costing $6 billion. They wisely decided to engineer the site to be fully self-contained. Any nuclear waste produced on site will be contained and disposed of on the site. That's one of the most magnificent high production state-of-the-art nuclear plants in the world.
TER: So, are there some oil ETFs that are interesting to you these days?
RW: As far as ETFs, we like United States Oil Fund (NYSE:USO), which we recommended when oil was back at $44. It's in the green and doing very nicely right now. I'm planning a recommended hold on that one all the way through until late fall. Then we'll be able to technically decide when another peak oil price arrives. That trade could be near 100% based on our entry.
TER: Any other plays in the energy sectors?
RW: I would not fiddle around with natural gas because of those two major gas finds in Louisiana. There's an abundance of gas right now. Then we noted those two natural gas pipelines from Alaska. They do not affect today's prices but can support in years ahead. They will bring in a lot of gas. These should be price negative in the longer view, but again they're years away from being settled out. So I would not trade natural gas for now. However, we should note a top institution we respect has forecast natural gas prices for later this year at $9. Since they are near $4 now, we think a production disruption (storm) of some kind would be needed to drive prices that high for the last quarter of 2009. Our 2009 natural gas forecast is $6 for most of the rest of this year barring a Black Swan unknown event. Do not forget, the U.S. is just beginning the annual hurricane season. This cycle can move energy prices dramatically until October.
On the good side, another one to consider is the oil service companies, which were beaten down in the selling event of the last quarter of last year. One I like is Apache Corporation (NYSE:APA). Apache is one of the larger service companies for the oil and gas industry.
TER: Is there anything specific about Apache as opposed to the other oil and gas service companies that you like?
RW: They're solid and large, and have the advantage they've got some magnificent contracts spread out over a long term. Historically, the company's been near the top of the pile as far as being a premium operation in that business. There isn't anything those people can't do as far as replacement, repair, exchange, and so on in any oil field equipment. They've been around a long time. It's really a fantastic company. A lot of the rally move has already occurred but fundamentally I would recommend the stock.
Usually what we're looking for in shares is we like to forecast-earn 20% to 24% as a minimum trade expectation. Now keep in mind Apache will follow oil prices. If oil peaks out and sells, APA usually sells back some on profit taking. Then, when the oil moves in higher in price in the future cycles, Apache should follow and rally with crude oil. So it's a stock we like. As far as the entry point, I think we have to be selective.
TER: Everything you've mentioned points to oil prices increasing.
RW: Yes, I think so. A lot of Middle Eastern projects went into stop mode or, crash and burn mode. Capital spending was drastically curtailed or, eliminated because they couldn't afford new projects. As rich as Middle Easterners are they've got budgets too; and their new ideas-plans were predicated on $80 oil, not $40 oil. The other consideration during a U.S. review of the last year and a half was when oil prices sold from $147 to $34; several projects would not pencil-out on budgets anymore. So what has happened is a lot of exploration work stopped, drilling was curtailed and many drilling rigs were shut down. Re-pricing and re-budgeting of industry related costs ensued. There will be a large vacuum or dead cycle as far as exploration between when oil prices hit $35 a barrel and when, in fact, they rise to $80 or $90. Companies will not start these new projects until they see an oil price of $60 or $80. Price instability in the energy industry creates exploration volatility in oil, natural gas, coal and unleaded gasoline manufacture. Gasoline's high was $4 and then sold down to $2 or less. Now it's back above $2 again. As new projects take several months and years to develop this plays havoc with long range planning.
Because of this time delay, which should be most of this year, I think you're going to see oil prices not only to $80, but somewhat higher further down the line. Politics is always a substantial and over-riding problem for the energy industry. The Greens are regularly making trouble and delaying projects somewhere. New ideas on carbon trading and carbon trading emissions are ridiculous and roadblock new energy sources creating emergencies on an on-going basis. The latest CAFÃ‰ standards and fuel efficiency rules for the auto industry are projected to cost $100 billion, adding $2,000 to the cost of each car while producing autos so light in weight the highway death toll will rise dramatically. This rule could not come at a worse time for auto manufacturers and contributes to the faster demise of the Big Three.
There's one more thing you need to consider and that is this: overriding everything, we've got the origination of new bonds and cash not only in our country, but it's a race to the bottom in devaluating currencies worldwide. I think this will create not only inflation, but potentially hyperinflation. And if we have hyperinflation and we have low oil production and shortages, you can imagine what the prices of oil and gas are going to be. It's going to get very interesting.
TER: It's going to be devastating. Thanks, Roger, this has, as usual, been very interesting and informative.
Using the nom de plume Traderrog, Roger Wiegand produces the popular Trader Tracks e newsletter, providing investors with short-term buy-and-sell recommendations and insights into the political and economic factors that drive markets. An insatiable reader, he digests a variety of domestic and international publications, with the economic, political, monetary and market news and commentary woven into his opinions and analyses. For more than 17 years, Roger has devoted intensive research time to the precious metals, currency, energy and financial markets. But his varied background - which includes graphics, writing, editing, sales, marketing, commercial printing, consulting and real estate development (from sand and gravel mines to landfills to residential/commercial projects. . .and trading - also shapes the view he shares. In addition to Trader Tracks, Roger also pounds out a weekly Rog's Corner-After The Bell column for Jay Taylor's Gold, Energy & Tech Stocks newsletter. For other essays, visit websites such as Kitco.com and, of course, The Gold Letter. Roger is a frequent speaker at The Cambridge House Resource Conferences. Visit Roger and Jay's website at webeatthestreet.com. Tel: 718-457-1426 Claudio Bassi, Manager email@example.com.
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