Oil prices have been in a bubble for a long time and recently have come back down quite a bit. If there is one thing I hate to do it is to buy stocks at the tail end of a bubble. Those are the kind of stocks I want to short, not buy. There are bubble stocks in oil. The natural gas prices and stocks also were in bubble mode, just like the solars were at one time. Ditto with many some of the coal stocks, although, again, longer term they will do well. When I see charts like the ones in those names I usually stay clear once the trend is broken.
The one exception I have made is MOS and POT. It is true that they have seen enormous gains in the past year and months. It is true that we are in a bear market and gains want to be slashed. It is also true that despite the ridiculous earnings numbers the chart is in a intermediate term downtrend. All of these factors do not make these stocks part of a bubble. Bubbles occur when earnings and demand for products do not keep up, or are soon likely not to keep up, with the rise in stock price. This is not the case for these companies. Their earnings has accelerated faster than the stock price and look to continue doing so for the foreseeable future.
Those who have followed MOS and POT in detail know that these stocks will continue to grow earnings at an enormous clip for the next 5 years at least.
The reasons are:
1. Enormous increase in global meat demand as the rest of the world gets richer
2. Inefficient crop developments that requires more potash and phosphate. This inefficiency is due to years of government price controls which has decreased farmers' incentives and hence yields and ingenuity
3. The lowest grain stock to use ratio in history... storage supplies are way down
4. A growing world population... this does not explain the sudden increase in crop prices... however it supports the longer term trend and exacerbates things
5. Ethanol... only 5% of food demand... it could be completely eliminated and not even make a dent.
However, the stock market is about much more than fundamentals. A lot of big names bought cheap put options before the earnings releases and they are more than willing to do anything to sell off now and reap rewards from the puts. Notice how the Aug 175s and 80s have gone through the roof the last few days. I did not buy but have been using hedging instead. Next time when I see the chart do what it has I will not only go short along with my longs but heavily consider buying the same puts that the hedge funds are buying while keeping the longs for the turn. Also take a look at the two year charts of MOS and POT... if they fall below the 200 MA lines (they will bounce first... probably tomorrow)... but if they do the trip down could be dizzying.
If nothing else this market serves as a lesson: If you are going against the long term and intermediate term trends the fundamentals may not matter... if the story of the two best plays in the market... ones with almost no fundamental weaknesses... aren't good enough to reverse a downward trend nothing is... consider going short or even better being hedged so that you can play the down side and the upside. For example, if we bounce off of the 200 SMA on MOS I will look to go short when we hit the resistance area on the chart 114 MOS and 180 POT (support turned resistance) to add the hedge. Same thing with POT. I said previously that I would go short along with the longs if we broke 114 on MOS and 198 on POT... well we did today...
Note: the lessons learned here can teach You a lot even if you are not in these names.
Let's take a look at support and resistance now that key 198 on POT and 114 on MOS have been broken... It's really 180 on POT and then the 200 SMAs for both... MOS already bounced a bit... I expect a snapback reaction... POT still has a ways to go around 165. In this market the technicals rule the show.... Generally, I feel like shorting MOS and POT was like buying UYG in the Spring.... the fundies just don't matter... it hurts to say that... that is until they do... and then it's time to reap the huge rewards on the other side... (see the island reversal of UYG in early May)....
BTW the DUG hedge helped too today. The other play? SMN. Both SMN and DUG may retreat to the 200 and then really take off from there... or we may get a little bit of a rally first in oil and the basic material stocks but I am skeptical as to how long it lasts. Take a look at the charts...
Above shows the charts of MOS and POT and will they do what BTU did?--------------------------------------------------------------------------------
Above we see DIG and SMN... these charts move together often... keep an eye on these------------------------------------------------------------------------
This is not the kind of market you want to take home to your mother...
One last thing... APWR hit its lower Bollinger Band... if it moves up tomorrow it may be good for a day trade or a swing trade... I plan to book at this one as well...
"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.
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