Wheeeew; what a day. However, how soon we forget our lessons...
Euphoric ? absolutely - and why not ? We got it the old fashioned way - we earned it !
However, every single time we have seen this level of celebration we have been hit with the cold slap of reality, every single time...What has actually changed here since Wednesday when we sold off ?
Yes; Crude Oil has surged nicely - but who immediately benefits from that ? OSX stocks ? - not immediately, in fact - maybe not for 2, 3, or even 4 quarters will strong crude prices generate any fundamental change in rig utilization, dayrates, or earnings; but the E&P's, Integrateds, refiners and Intnl Oils do reap the immediate rewards - food for thought...
As such; I stand by selling OSX stocks continually into this strength and rotating into the actual subsectors and stocks that reap the immediate fundamental rewards of this move in crude prices. While the Street will most definitely look forward in valuing the Oilpatch, the recent earnings commentary from numerous CEO's has moved the timeframe back at least 1 and possibly 2 quarters to Q4 '99 to Q1-2 2000 before we see a dramatic change in fundamentals and earnings. By any neutral measure, we have gotten a bit ahead of ourselves. Yes; George - I admit, that I was wrong in my short term thoughts on a retracement sub 60 here, as I thought the Street would wait to see how the earnings info unfolded and untill they saw what OPEC's compliance was.
Wrong on the retracement in the OSX, but right on the rotation into E&P's, Integrated's and laggards as their gains have equaled and even exceeded the OSX index of late and most importantly (imho) leave me sitting in a much better fundamental position than the OSX and with much, less downside risk. Only time will tell...
I still feel that the shorts will turn on the juice with a vengeance shortly, as the buying and the short covering spike here will subside. Perhaps many of the analysts who suggested a 15 % retracement being due here will be right - only it will be off of OSX 72 (thanks to the cyclical rotation in the entire market) and not off of 64-66. As such, OSX 60-62 ish looks to be a reasonable support area.
While I agree that there is virtually no possibility of new lows, we are fundamentally overvalued on a time/value basis in the drillers and service stocks imho. Quite simply, the driller and most service stocks are more than a little ahead of themselves here. OSX 85ish is a reasonable target, but we may just have to push back the timeframe a quarter, or two - untill we see real change in utilization, dayrates and new service/const projects.
We still have most of the earnings reports yet to be released. While there appears to be few nightmares, there also is little to be euphoric about nearterm fundamentally. Some CEO's have commented that fundamentals (utilization/rates) may actually soften yet a bit from here, before starting to improve later this year, or early next year. Analysts have allready been reducing earnings estimates and are backing the recovery timeframe to Q1-2 2000 for a ''business as usual'' enviroment.
There is just going to be a fundamental dead-zone here shortly for the OSX - that is why I love where I am (E&P's) versus the OSX. I still hold some OSX stocks and would be as happy as anyone if we just blow right up and on through OSX 85ish, as my E&P's & Integrated Oils ride right alongside the OSX. But, anytime we see a 2, 3, or 4 day run like this - in a fundamental enviroment like this - with two looming unanswered questions (earnings reports & OPEC compliance) I will still keep selling into this strength/taking profits as long as we continue with this degree of momenteum. Nothing else makes sense to me ....
At least 1/2 of the last two days gains (imho) were exactly what George Cole so aptly referred to as the shorts being ''drawn & skinned alive.'' We saw more than a few block trades that were near panic short covering here. We saw big blocks like this trade below - at a 13% tic up ? - C'Mon ....no working the tape there - sheer panic short covering. GeorgeC - the shorts were indeed drawn in and skinned alive today.
Friday April 16, 3:21 pm Eastern Time
BLOCK TRADE - IRI International 400,000
at 4-5/8, up 9/16, crossed by Lehman Brothers
While the short covering is a Godsend and it is sweet revenge, it does not change the near-midterm fundamentals of rig utilization, dayrates and earnings. Yes, the last time we had $17 Oil - we were at OSX 104; but we had an entirelly different set of rig utilization #'s, dayrates and earnings were entirely different. Also, do NOT sell the short traders ''short'' here (pun intended). They will wait untill the buying and short covering subsides and then they will get their pound of flesh - bank on it. They have done a very good job of late and are to be commended as the worthy opponents that they are...
Not trying to spread gloom & doom here, but momenteum has to allways be measured against the stark reality of fundamental valuations. How many times has ''holding'' here and ''not'' taking some profits off the table resulted in a near complete retracement and paper loss off virtually all of a rallys gains ? - The answer is all 4/5 times in the last 7 months ! Virtually every time ! We obviously have NOT as yet had a run from OSX 45-50 to 70 that has stuck and NOT retraced back to the 50's, or less !
I will acknowledge that this one just may be the one that does stick - but for the 4th, or 5th time - I will take profits off of the table and may get my 4th, or 5th chance in 8 months to buy the sector at least 15-20% cheaper after having done so.... I'm sticking with what's working for me - why fix it - if it isn't broke...?
The OSX faces a few obstacles here - the toughest hurdle looks to be cleared; that being - ''the price of Oil - stupid.'' But, we still do need OPEC to follow through on their pledged new cuts - which I fully expect they will. However, the International Oil Majors actually control the destiny of the Oilpatch here. Untill they increase Cap Ex budgets - we do not get the utilization, dayrates and cooresponding equipment & service increases necessary to drive earnings and analyst estimates upward. Untill the fundamentals actually change - I stand by selling into strength and playing the rolling trading ranges.
good luck - and I still stand by that good 'ole Motto -
Pigs get fat - but, Hogs get slaughtered !
Nothing wrong with getting a little fat here - but don't get greedy and get slaughtered - ie: watching another retracement potentially erase all, or most of your gains...that is exactly what has happened on each of the last 4/5 runs...it's a tall bet that this will be different in light of all of the Industry commentary of late... The future is indeed very, very bright - but these wonderfull paper profits are not yours and you don't get to keep them unless you actually take them !
Mine are in the drawer and I'm sleeping like a Baby tonight - Monday can only bring me opportunity...be carefull out there. |
