Mysterious Happenings In The Oil Patch (Stocks)

The NYTimes, no charting haven but sometimes interesting none the less, happened to have an article that should be of interest to all who wonder how long this terrific market will continue (and if you’re reading this blog but aren’t interested then you’re in the wrong place). In the article, entitled “Around the World, Stock Markets Fell and Rose, Together“, Floyd Norris reports:

The United States stock market has just completed its best six months since 1933. From March 9 to Sept. 9, the Standard & Poor’s 500-stock index leaped by 53 percent……..Amazingly, however, the American stock market was one of the least volatile markets in the world in the last year. It was among the best markets when it was plunging, and among the worst when it was soaring. Over all, it ranked near the bottom among international markets……If history is a guide, the strong recovery may be an indication that better prices are still ahead. Since World War II, there have been eight periods before the current market when the S.& P. 500 managed to rise at least 30 percent over a half-year period - in 1963, 1971, 1975, 1980, 1982-83, 1991, 1997 and 1999. A year later, the index had made further gains in seven of them. The exception was 1980, when the economy went into a double-dip recession and dashed the hopes of investors who had bet on a continued rise in stock prices.

I confirmed these results when I wanted to test the importance of all the conversation concerning how awful September and October are historically and, by inference, predicted to be this year, too. What I discovered, however, was that markets closed higher on December 31 than they did on August 31 in 34 out of 47 years since since 1962. The worst 4 month periods of the 14 that had a lower year-end close were 2008 and 2000, both years in which the market had already been declining prior to August 31. The third worst was 1987 due to the Crash that October. The average gain for the 31 up years was for the 4 months was 6.9%. Exclude the 3 crash years, the decline for the remaining 11 years was a non-staggering -3.8%. So the prospects for the next 4 months based on the past 47 years’ statistics is for a strong finish to year-end. (statistics available in spreadsheet form by clicking here)

If you’re not in stocks now or have some new money to invest, what should you buy? Banking stocks as a group are up 119% since March 9, Insurance stocks are up an average 86% and Computer Hardware stocks are up an average 82%. If the big money herd has sideline money left to put to work then are they going to buy these stocks or will they put their money to work on some industries that haven’t been bid up so much already. My guess is that a good chunk of the money will be put into energy stocks which as a group are up 54%.

Specifically, many oil& gas stocks have formed the same reversal patterns (head+shoulders, ascending triangles, etc.), with breakouts highly likely. Some names include (click on symbols for the charts):

• SD (SandRidge)
• HLX ((Helix)
• HERO (Hercules)
• CRZO (Carrizo)
• KWK (Quicksilver)
• PVA (Penn Virginia
• SM (St. Mary)
• PXP (Plains Exploration)
• COG (Cabot)
• CHK (Chesapeake)
• APA (Apache)
• CEP (Constellation)

This is by no means an exhaustive list, it may not even include some of the best stocks and some of these chart patterns may actually fail. But the list could go on and on because there are so many great looking charts for you to scan through to find the one(s) you like best (in full disclosure, I already own the first two on the list).

There’s something going on in the oil patch that’s contrary to what you read or hear from the TV Talking Heads (e.g., huge inventories, price pressures). The charts tell a different story as I see it. They tell a story of slow accumulation and breakouts galore coming as we approach year-end. If you missed out on the low priced financials in March and the energy stocks last year now’s your opportunity again.

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