CEA Portfolio Update – February 2015
XLE vs. Crude: A Bullish Divergence!
As you know, I sent out an email on February 5th, alerting you to the buying opportunity in the Energy Select Sector SPDR (XLE).
Here’s additional insight into why we made this trade, and how it’s performing thus far.
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Despite a monumental 60% price downturn over the past eight months, there’s still no sign of a definitive bottom in the oil market.
Even though the price of West Texas Intermediate (WTI) is higher than it was a few weeks ago, there are warning signs the commodity may slide lower into Spring.
What are these signs?
First of all, US stockpiles are hitting new highs with each passing week.
According to the Energy Information Administration (EIA), US crude inventories jumped to 425 million barrels for the week of February 13th.
That’s the fourth straight week US inventories have set a new 80-year high!
No doubt about it, the US is swimming in crude right now…
Secondly, workers at 12 US refineries are currently walking the picket line in hopes of achieving higher pay. Since these refineries account for one-fifth of US production capacity, it’s having a bearish effect on the price of WTI.
After all, if refineries aren’t converting crude into gasoline and other usable products, oil supply will only pile up in storage facilities.
As of this writing, the strike is in its fourth week with no signs of a bargain in site.
But here’s the deal…
Long-term crude market bulls still have a few very important things going their way.
As I mentioned in the trade alert earlier this month, US oil directed rig counts are dropping quickly as shale producers pull in the reins on exploration.
What’s more, major international explorers like BP Amoco (BP) and Royal Dutch Shell (RDSA) have announced massive capital expenditures reductions for 2015 and beyond.
While supply/demand information leans bearish in the short-term, the long-term outlook is definitely in favor of the bulls.
It’s not really a question of if crude rallies back above $70 a barrel- it’s when!
And there’s something else I want to show you today…
Despite the uncertainty surrounding oil, trading in the world’s leading oil companies has remained strong in February.
Take a look at this chart…
As you can see, WTI crude (blue line) has dropped into negative territory on the month. However, the Energy Select Sector SPDR (XLE) (red line) is still showing gains of just over 3%.
What’s it called when oil stocks outperform the commodity they produce?
… a bullish divergence.
How’s it work?
Despite continued weakness and uncertainty in crude, investors know the ultimate bottom in the commodity can’t be far away. That’s why they’re accumulating best of breed oil stocks now. Once oil finally puts in a permanent bottom, they’ll have front row seats to an industry upswing.
While there’s no guarantee this divergence remains intact in the coming weeks, it’s a very good sign for oil and gas industry stocks.
Remember, XLE holds the world’s largest and most stable oil companies. Names like Conoco Phillips (COP), Chevron (CVX), EOG Resources (EOG), Occidental Petroleum (OXY), and Exxon Mobil (XOM) are all held in the commodity ETF.
But there are still more signs pointing to a bottom in oil stocks…
otice how XLE broke above (green circle) a very important technical resistance trend line (red line) in recent trading. Without question, the break of this line is another feather in the cap for anyone bullish of large cap oil stocks like us.
Now listen closely…
Even though it’s possible crude breaks to new lows in coming months, the odds are growing that XLE has already seen its lowest prices of the year.
In my opinion, oil would have to drop substantially (into the low $40- high $30 range) in order for XLE to crumble back to the January 2015 lows of $72.50.
That’s why I suggest you hold your position in XLE through any looming downturn in the price of oil. What’s more, if you haven’t already bought XLE for your portfolio, I recommend you do so at any price under $80.25.
I also recommend you keep your stop loss at $71.75, which is approximately 10% lower than current prices.
We’re onto something good here folks. Don’t let continued oil market volatility scare you away from this trade. By mid- to late-2015 I suspect XLE will be trading drastically higher than it is now.
Keep holding XLE for higher prices!
Commodity Review
| Commodity | Ticker | Current Value | Last Month | Change |
| Energy | JJE | $10.09 | $9.12 | +10.6% |
| Grains | JJG | $35.81 | $36.16 | -1.0% |
| Industrial Metals | JJM | $25.28 | $25.81 | -2.1% |
| Precious Metals | JJP | $56.95 | $61.83 | -7.9% |
| Softs | JJS | $37.29 | $39.88 | -6.5% |
| Livestock | COW | $26.30 | $27.11 | -3.0% |
| ALL COMMODITIES | DJP | $28.88 | $28.56 | +1.1% |
| As of 02/23/15 |
Energy Commodities
Thanks to record breaking cold in the Central and Eastern US the past few days, natural gas is finally showing signs of life. The commodity rallied to the $3 mmBtu mark in recent trading as investors factored in the increased natural gas demand that comes with brutally cold weather.
But here’s the deal…
Dig into the most recent EIA natural gas inventory report and you’ll find US storage levels are now above the 5-year average. What’s more, they’re 45% above where they were last year at this time.
Clearly, US producers are keeping the market well supplied- despite the cold weather.
While we may see a short-term jump to higher prices on this Thursday’s EIA report, I suspect natural gas will dwindle in the $2.50 to $3.00 range for at least a few more months.
Grain Commodities
It has been a rather boring winter in the grain markets.
Corn and soybeans have essentially traded sideways since December 2014.
While wheat had a considerable bullish run late last year, the commodity is currently trading back near multi-month lows at $5 a bushel.
But with Spring right around the corner, we’ll likely see volatility in grains pick up again soon. After all, once April rolls around, farmers will start entering the fields for the planting season.
Until then, let’s keep holding our position in the Teucrium Commodity Trust Corn Fund (CORN). With CORN currently trading at $25.44, we’re still sitting on a solid 8.6% gain. But once the market figures out that farmers will likely plant substantially less corn than last year, CORN should experience a bullish run into late 2015!
Industrial Metals
After a brutal downturn in early 2015, copper prices are on the mend. Since late January, the red metal has rallied from $2.40 a pound to $2.60 in recent trading.
While the past month’s rally isn’t much in the grand scheme of things, there are signs the global copper market may experience supply issues at some point in 2015.
According to Citibank, global copper mine supply is looking increasingly constrained.
Production guidance across major copper mines has been slashed in 2015. In fact, Rio Tinto (RIO), BHP Billiton (BHP), and Glencore (GLNCY) have all cut output guidance at specific mines by 50,000 to 150,000 metric tons this year.
While we likely won’t see an imminent spike in copper due to this issue, it does point toward a more bullish supply/demand picture as the year wears on.
For now, let’s remain neutral on copper. But if we see another big downswing in coming months, we’ll look to scoop the metal up on the cheap.
Precious Metals
The early year precious metals rally is fizzling out…
As you know, gold and silver got off to a great start in 2015. The metals were the top-performing commodities at the end of January on a year-to-date basis.
But February hasn’t been kind. Gold has shed nearly $80 an ounce since the start of the month while silver has shaved off just over a $1 an ounce.
What’s going on?
The inflation uncertainty created by the European Central Bank’s (ECB) acceptance of a quantitative easing (QE) policy was short-lived.
Investors once again seem content with waiting to see definitive proof of inflation before seeking the protection of gold and silver.
Since the ECB’s stimulus plan doesn’t start until March, it will likely be some time before investors start seeing signs of inflation leak into the Eurozone economy.
What should we do with our position in the Market Vectors Gold Miners (GDX)?
Much like the situation in oil explained above, GDX is holding up rather well considering the fact gold is back to where it was at the start of the year.
In fact, the gold miner ETF is still up 11.75% year-to-date.
While it’s not out of the realm of possibility to see GDX trade below $20 again this year, I suggest we keep holding the commodity ETF through any looming downturn. If the opportunity presents itself, we may even add to our GDX position at lower prices.
Softs
The past month has been a mixed bag for soft commodities. On one hand, cocoa and cotton have performed well in February with respective gains of 9.3% and 12.9%. Meanwhile, orange juice, sugar, coffee, and lumber are all breaking to new multi-month lows.
Is there a profit opportunity in any of these markets?
As long time readers are aware, we collected hefty gains in coffee last year. In my view, coffee has the best bullish profit potential again in 2015.
Not only is global coffee demand on the upswing, but industry experts are expecting a global supply deficit of around 8.9 million bags- the largest in nine years!
For now, we’re just going to keep an eye on softs. But when I see an opportunity, you’ll be the first to know!
Livestock
Believe it or not, feeder cattle are back below $2 a pound…
As you may remember, 2014 was a phenomenal year for cattle prices. Feeder cattle surged over $0.70 a pound from the onset of 2014 to the record $2.40 highs set in October.
What’s causing the current downturn?
For starters, wet winter weather is helping to ease the drought in Texas and other Western states. That has ranchers buying cows to strengthen their herds. Increased cattle numbers will help ease the supply shortage that sent feeder prices zooming to all-time highs last year.
Category: Commodity Trading
