Posted March 17, 2023
By Sean Ring
Energy Stocks are Good, But Are They Good Right Now?
- With SIVB, Signature, and now Credit Suisse all getting bailed out, a recession is far more likely.
- If that’s the case, crude oil, natural gas, and other energy sources will see another down leg.
- In short, things will get worse - maybe far, far worse - before they get better.
Micah, Pam, and I are driving to Nice, France, this weekend. (Believe it or not, the Rosé on the Riviera is supposed to be excellent. Allegedly, it doesn’t taste like grape drink!) I’ll sample it and report to you on Monday.
But first things first. And that means energy and energy stocks.
In our last Paradigm editorial meeting, our publisher Matt Insley asked a question that’s vexed me ever since.
The question was, “We know and love energy stocks. But should we own them right now?”
It’s one of those questions that gets to the heart of an investor’s biases.
I say that because, heck, I’m as biased as the next man.
I was sure we were going to freeze in our jammies this winter. Because it was going to be extremely cold, and the sanctions on Russian energy were shooting Europeans in the wallet.
I was sure we wanted to own natural gas, oil, and their accompanying stocks because it was all so sensible.
But last Friday night, it was 68F (20C) in Asti. Micah was running around with his jacket off. Micah’s friends’ parents, Pam, and I cracked open some Moretti beers in Piazza San Secondo (our town square) while watching our kids play hide-and-seek.
When the sun finally set, it got cooler. But it wasn’t winter cold. It was midsummer cool.
To be fair, it hasn’t been cold here since January.
Sure, stocks were rallying hard. But energy and energy stocks were beginning to roll over. And that’s when I started thinking… maybe we won’t get that insane, sustained rally in energy.
I didn’t want to believe it. Just like you, I was - and still am - massively long energy stocks in my retirement portfolio.
So, this first quarter of 2023 has been a real kick in the goolies for me. And I imagine, for some Rude readers, as well.
And not just us, but this entire business has been - and remains, funnily enough - massively pro-energy.
So please understand if you lost money on energy stocks… you’re not alone!
Be all that as it may, I thought I needed to hedge my opinion for the first time. Let me show you some examples of how I did that, not in my retirement portfolio, but as a trader.
It’s important that you know you’re not the only one who may have been hit hard on energy stocks. Truthfully, the energy stocks in my retirement portfolio have, to quote Michael Lewis in Liar’s Poker, “gone down faster than an 18-year-old on prom night.” It’s painful, to be sure.
Just know the below is what’s going on in my smaller trading account for your edification and learning, not my braggadocio.
Three Stocks I Shorted
In the Rude, I don't make single stock recommendations... As a daily writer, I concentrate on the big picture. But because the "big picture" story matters here - and the energy sector has been confusing to many readers - I need to share some recent trades I made...
Just keep in mind these trades are “what I did in the recent past” examples, not recommendations.
Devon Energy (DVN)
Unbeknownst to me, good friend and smartest working analyst in the newsletter business, Dan Amoss, fundamentally loves this stock.
Another oil and gas analyst friend fundamentally hates this stock. So, when that friend said, “It’s only a matter of time before DVN gets crushed, I looked at the charts.
Here’s what I saw on January 11 of this year:
There’s no name for this chart pattern, but my eyes widen when I see it.
We have a double top around $72.50, followed by a near-death cross (the 50-day MA crossing below the 200-day MA). The actual price was hovering right on the 200-day MA.
I gambled on a long shot by buying the DVN Jul 50 puts on January 11 for $3.30. I thought that it surely could get below $50 if my friend were correct. I bet bigger than usual by buying six puts in total.
Now understand this: I’ve got nothing against DVN as a company. I just hated the warm weather, the oil price falling, and this chart.
Let’s fast forward to Wednesday (2 days ago).
Here’s the chart:
After an initial rally from $61 to $65 which had my puts losing, DVN cratered. Those puts closed above $8 yesterday.
This position is still open. I’m being a bit greedy, but I’d like to see them get to $11 or so. We’ll see.
EOG Resources, Inc.
Later, I was looking to add to my energy shorts.
Again, I have nothing against EOG, but I didn’t like the stock movement for the same reasons I didn’t like DVN.
What I liked even less were the two massive red (down) candles within a couple of months of each other. Somebody somewhere was trying to dump this stock.
When that second huge red candle pierced the 200-day MA, I thought it might be game over.
So, on February 17, I bought 2 Apr 114 puts for $6.00. It was a smaller bet than DVN because I was less sure my surmises would come to fruition in time for the shorter expiry.
Luckily for me, EOG followed the energy complex straight down. Yesterday, I closed out 1 of the puts for a 50% gain and 1 for a 100% gain. (My friend, colleague, and options expert Alan Knuckman taught me that trick. It’s good for a 75% gain overall.)
Another company I’ve got nothing against, COP’s stock chart looked exactly like EOG’s.
So, I thought I’d buy 2 Apr COP 100 puts @ 4.29.
This, too, paid off a nice 75% gain:
COP got crushed for the same reasons EOG and DVN did.
Again, these aren’t bad companies. But as you look at the chart, you can see the “boom” clearly preceding the “bust.”
Please understand these small trading wins in no way make up for the losses in my retirement portfolio. But I’ve got a few more years to make them up. (But certainly not as many as I’d like.)
Will these stocks come back? I’m sure they will. And they may do so just in time for summer.
But I’m pretty sure right now isn’t the time to buy energy stocks. They’re all getting slammed.
Three More Charts Showing Energy Nosediving Right Now
First, let’s visit the XLE.
The XLE is the S&P energy sector index. If you look at the chart below, it makes a compelling case that this energy rally has concluded and that we’re on our way down.
The MACD on the XLE is showing the greatest overbought reading ever.
Moving average convergence/divergence (MACD, or MAC-D) is a trend-following momentum indicator that shows the relationship between two exponential moving averages (EMAs) of a security’s price.
The MACD line is calculated by subtracting the 26-period EMA from the 12-period EMA.
The result of that calculation is the MACD line. A nine-day EMA of the MACD line is called the signal line, which is then plotted on top of the MACD line and can function as a trigger for buy or sell signals.
Traders may buy the security when the MACD line crosses above the signal line and sell—or short—the security when the MACD line crosses below the signal line.
MACD indicators can be interpreted in several ways, but the more common methods are crossovers, divergences, and rapid rises/falls.
Finally, the XLE has been getting smashed compared to the overall SPX.
None of those signals is bullish for the energy sector.
Source: @daChartLife via The Chart Report
Next, J.C. Parets of All-Star Charts fame shows how crude oil futures have resolved their triangle pattern to the downside.
That’s not unusual at all, to be sure.
But now crude futures are below a level with much overhead resistance. It’ll be challenging to get back above that line for a while.
Source: @allstarcharts via The Chart Report
Ian McMillan shows the same chart as J.C., but it’s his comment that caught my eye.
I’d even ask, "Is this oil chart demonstrating the demand destruction the Fed was trying to cause with its rate hikes?”
Source: @the_chart_life via The Chart Report
I would answer the question I posed in this Rude’s title by saying, “No.”
The balance of probabilities shows there’s more downside to the energy story. And that it’ll probably get much worse before it gets better.
But I must stress these aren’t bad companies, just bad timing.
It’s hard to believe only a few months ago, Germans were googling “firewood” to see how they could heat their houses.
Now, we’ve got our shades on and our jackets off in mid-March.
But keep your chin up and your head clear.
More opportunities are coming our way, but we need to see them.
And while we wait for energy stocks to rebound, buck up on your gold knowledge by reading this, if you haven’t already.
Have a wonderful weekend!