Friday, March 25, 2011


We've had a few headlines over the last few weeks that have moved markets.  We've seen a tremendous drop in assets after the earthquakes in Japan and the following nuclear drama that continues to unfold.  Since the initial drop we have seen a swing back to the upside which has bears in knots again and dip buyers loving life.

As I've taken a few days to review the coming end of the first quarter, I can only shake my head and affirm that something other worldly is going on.  A few days ago I postulated that perhaps it was an increase in solar flare activity that has the world going nuts.  I mention this in jest, but there is a lot of study that has been conducted that does find a correlation between solar activity and human unrest, natural disasters, and even serious market corrections. ( ) Think about it, we have absolutely no idea what affects the masses or provokes them to take action at a specific date and time.  The seeds for all of the things that have been going on have all been there, it just happens to all be going nutty at once.  Here is a partial list of the maniac behavior being exhibited on the earth currently;

A)  Charlie Sheen is absolutely freaking bonkers.  It may have been a media hype job, but there is some piece of absolute wackoness in that guy and the switch just got tripped.
B)  Riots in just about every country on earth with the exception of nations filled with fat sheep (USA comes to mind - but of course I forgot about the non-sheep unionites in Madison that are rioting because their ability to rip off the taxpayer is being removed).
C)  Union riots in Madison
D)  Japanese earthquake
E)  President Obama is more of a war-monger than the Bushes.  How about attacking Libya and their tyrant and then getting cold feet?  Ooops!  How many civil wars will we start through Fed policy and foreign policy blunders?
F)  Irish interest rates push through 10% and people still own the stuff?  I'm sure they are good for it just like Portugal, right?

I wanted to do a quick post that would highlight several of the areas I've been in and also positions that I'm watching.  As I highlighted back at the beginning of the year, energy and commodities would be themes I felt would benefit from the continued use of QEII.  All the way back on January 17th, I identified that one of my favorite trades for the year would be UGA. (go to the end in the TRADING UPDATE section).

We all know the reasons for this trade;
A)  Weak dollar
B)   Emerging country use of cars is growing exponentially
C)   US Summer price fundamentals (seasonal increase) through the first half of the year and $4.50 gas is reachable.
D)  Technical chart strength at the time as price action went through the $40 level.

What has occurred since that time has been exactly what I highlighted but the trade has also benefited from the Middle East unrest.  This really isn't a post about how great the call was, especially since I did not anticipate the riots and think that we are way ahead of where I thought we'd be after just two months.  At this point we see oil at $105 and gasoline is trading at $3.05.  I've included a link here from Yahoo News that shows that US gasoline inventories have actually declined for several weeks.

The risks to the trade are that we continue to see rising oil reserves and that translates into larger stockpiles of gas.  Other risks include that idea that uncertainty and unrest go away, all rioters are placated with billions of petro-dollars, and also that the US dollar catches a bid. Given that I actually see a case for an announcement that QEII will be extended to late August (not more money, but more time), I think that the dollar bid catching is not a worry, and if anything our foreign policy actions will create more unrest in the Middle East in the coming weeks and months.  Even the collapse of Ireland or Portugal may have the impact of driving up the dollar, but I don't think it does much to stifle the move up in gas during the next few months. 

Previously I had indicated that $40.00 was our support and the initial price target for UGA was $52.00.  Please examine the chart below and find that the upper range of the trade is $67.00.  I personally won't be around to see $67.00 in the trade, because I will have a forced time stop here where as we reach the middle part of August I will begin selling.  No matter what, I do believe now that $60.00 is in the cards for this trade.  Levels to watch include the minor overhead resistance at $50.00 and also at $52.00.  I have a stop set for $45 on this trade.



Meanwhile, we have seen new home sales continue to go lower as the competing inventory of existing homes and tough credit standards impairs the ability of the new construction market to improve.

I've included a chart for the homebuilders (XHB). These guys have rallied strongly since the summer of last year (what didn't?) but have stalled over the last month.  The bulls really need to push this to $19 and even through $20 to make this chart workable for me on the bullish side.  From a longer term perspective I like that the 14 EMA is way above the 40 day EMA (in the weekly chart below).  On the other hand, if $17 were to be penetrated here, $14 is a meaningful target.   

From a fundamental perspective this trade may be one where investors are betting that the homebuilders just can't do worse, so you might as well buy them.... that worked well back in 2009, I guess it could still hold true.  My concern for homebuilders though is that the inventory of existing homes continue to get cheaper and there is going to be a point where buyers just don't or can't justify building when there are perfectly good used homes with all the window hangings and landscaping done already.  I think the really wealthy are still building their dream homes, but poor folk and middle class folks are just doing perfectly fine with better priced alternatives.  If commodities continue to sky-rocket, construction costs for homes will make the choice a no-brainer (not to build.... I think we are pretty close to being there already - welcome to the new normal right?).