Why Oil Stocks Rose As Oil Fell

THE FINAL NUMBERS - MIXED MARKET NEWS: A mixed day on Wall Street as the blue chips hold onto small gains and the technology stocks fall. The Dow closed with a gain of 70 points or 0.6% after being up triple digits earlier. The S&P 500 eked out a one point gain on a late-day rally. The NASDAQ did not fare as well, losing 15 points or 0.6%; not a bad close considering the index was down as much as 45 points late in the afternoon.

THE BOTTOMLINE: The news that Lehman Brothers (LEH) raised $6 billion at a price that was 13% below Friday’s close weighed on the market throughout the day. The major concern is that the end of the credit crisis is not yet upon us. The KBW Bank Index fell another 3% today and is closing in on the 2002 low.

For the year the index is down 24% and the S&P 500 is down 7%. It is not uncommon for individual investors to be down well over 10% in 2008. Whether you invest in stocks, mutual funds, or ETFs it has been a very difficult year. Especially for those investors in mutual funds, due to the large exposure many have to the financial sector. This is why asset allocation and stock/ETF picking becomes an integral part of beating the market.

McCALL’S CALL - OIL FUTURES VS. OIL STOCKS?

NEWS: On Friday the price of oil had its biggest one-day gain ever in terms of dollars. At the same time the SPDR Energy ETF (XLE) fell 1.7%. Today oil dropped by 3% and the price of XLE rose by 3%. What gives?

THE BOTTOMLINE: I have yielded a number of call/emails on the divergence between the price of energy futures and energy stocks. Everyone wants to know how the two cannot move in lockstep, especially on days when big moves are made. I wish I had the answer to all questions, but this is one case where I will have to speculate with an educated guess.

On Friday the late-day selling of the energy stocks as oil surged could have been caused by the fact investors were selling all sectors. There is also the theory that when the market pulls back big, the biggest winners are the first to be sold as investors lock in gains. If that were the case it would be understandable that the energy stocks were sold to bank large profits. My other theory is that investors were anticipating a pullback in oil and therefore sold the energy stocks before the weekend. Today’s rally in the energy stocks as oil fell can be contributed to a sector upgrade and the fact that with oil anywhere near these prices, the energy companies will blow earnings out of the water.

In the short-term there is a better chance of weakness for the energy futures and stocks. Longer term I remain bullish on both and therefore would be looking to buy if oil pulls back another 5-7%.

THE DAILY ETF UPDATE - UTILITIES OFFER OPPORTUNITY

NEWS: The energy ETFs and other related commodity ETFs were the big winners today even though the price of oil dropped significantly. Also have a strong day were the utility ETFs; the SPDR Utilities ETF (XLU) added 1.6%.

THE BOTTOMLINE: The chart of the Dow Jones Utility Average is not overly bullish, but at the same time it has not broken down similar to the other major indices. Even with the rough day on Friday, the index is holding above all major support levels and could be considered a buying opportunity. The index closed the day at 518, well above the 510 area, where all three major moving averages are sitting. Along with the support at 510, there is also more price support at 505. The setup is what we call a high reward-to-risk opportunity for traders and investors. If the index were to break down below 505 it would be a signal to sell.

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