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Buy XLE to Benefit from the Likely Uptrend in Crude Oil

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We had recently forecast that crude oil is likely to rally to $68 levels in 2018. If proven correct, the trade offers a gain of about 31% from current levels. However, holding crude oil futures for the long-term is a risky proposition, best suited for crude oil producers who use it as a hedge.

Key points

  1. We expect crude oil prices to rally
  2. Tax reforms are likely to be positive for energy companies
  3. XLE is likely to be the best bet to ride the upcoming rally in crude oil

For small traders, crude oil futures are best traded on a short-term basis. So, is there any other way we can benefit from the forthcoming rally in crude oil?

Yes! We can either use individual stocks or the ETFs to benefit from the appreciation in crude oil prices. In this article, we will focus on the ETF that will give us the maximum bang for our buck.

All ETFs are not created equal. Therefore, their results also vary accordingly. We will consider and compare the three popular oil ETFs – USO, USL, and XLE. We shall provide a brief overview on all the three and then choose the one most suitable for us.

United States Oil Fund LP (USO)

This is one of the popular oil ETFs used by traders for short-term trading. It has $2.27 billion assets under management and has been in the markets for more than 11 years. It holds the near-month derivative contracts of oil, rolling them over to the future months once they expire.

This results in a huge roll over cost, due to which, in the long-term, it usually underperforms oil by a huge margin.

It has a decent average daily volume of $170.53 million. Therefore, the spread is unlikely to eat away into the trade. However, due to its huge underperformance in the long-term, this will not solve our purpose.

United States 12 Month Oil Fund LP (USL)

USL tried to mitigate the negative of USO by dividing its assets over twelve months. It holds futures contracts of the upcoming 12 months. Once the current month contract expires, a new position is opened which is 12 months out.

However, this has not become very popular with traders and its total assets under management are only $96.5 million with a daily volume of $1.06 million.

Energy Select Sector SPDR Fund (XLE)

The third popular ETF is XLE. This, however, does not invest in derivatives like the two mentioned above. The fund invests in top energy companies listed in the S&P 500. Therefore, it doesn’t track crude oil futures directly, but, usually, when crude oil prices rally, so do the energy companies.

XLE has $16.41 billion of assets under management and is the most liquid of the three, with average daily volume of $723.93 million.

As this owns large oil companies that are known to pay a good dividend, the investors can get additional income while holding it for the long-term.

A comparative study of the three ETFs

Let’s compare the performance of these ETFs with that of crude oil and see which one mirrors the crude oil prices in the long-term.

5-year comparison

Over the last five years, XLE has been the best performer, even beating the underlying asset by a huge margin. While crude oil is down 39.28%, XLE has only fallen 6.13%.  USL has fallen 51.34%, while USO is the worst performer with a 66.84% fall.

However, we don’t plan to hold for that long. Our time frame is just over a year. So, let’s compare the performance of the ETFs from the lows of February 2016 up to now.

From the lows of February 2016

From the lows of 2016, both USO and USL have generated about 31.65% returns for their investors, compared to the 91.58% returns in crude oil. XLE, however, is the laggard, having produced only 24.88% returns.

XLE is likely to regain its sheen soon

The plunge below $30 a barrel levels in 2016 really sapped the sentiment in crude oil. The companies were struggling to stay afloat. Though the companies are not selling oil at a loss at the current levels, they are only managing a small profit. However, if crude oil rallies to above $60 a barrel levels, these companies will earn more profits.

The energy sector is the second-worst performer in the S&P 500 in 2017. As a result, this is under-owned, but we expect the interest to return once crude oil is able to breakout and sustain above $55 a barrel levels.

An additional tailwind to the energy companies is the passage of the tax reforms. President Trump and the Republican party are likely to put their best efforts to pass the tax reforms at the earliest. After all, they have not been able to claim any legislative victory since President Trump took charge of office, though they are in a majority in both the Senate and the House.

How much will the energy sector benefit from the tax cuts?

JP Morgan believes that along with tax cuts if one considers the immediate expensing of capital expenditures, energy sector stands out to benefit the most.

Therefore, dual benefit from higher crude oil prices and the tax reforms is likely to bring back the interest in the sector. Once money starts pouring into oil stocks, XLE is likely to gain momentum and offer attractive returns.

Let’s look at the charts and try to find the best entry and exit levels for XLE.

What does XLE’s chart forecast?

XLE is in a long-term downtrend, however, it is attempting to form a base around the $60 mark. Once the ETF breaks out of $70 levels, it is likely to rally to $78.45 levels, the highs made in mid-December of last year, just days after the OPEC production cut deal and about a month after the US Presidential elections.

However, if crude oil prices rally to about $68 a barrel levels, we believe that XLE can reach $84 levels and higher, a level last seen in 2015 when crude oil prices were closer to $60 a barrel.

Let’s determine the entry and stop loss levels from the daily chart.

XLE made a yearly low on August 21 and has since then been in a sharp pullback. For the past few days, the ETF is in a consolidation, digesting the sharp gains. It has been sustaining above the 23.6% Fibonacci retracement levels of the rally from $61.8 to $68.93, which is a bullish sign. If this level breaks, the next supports are at $66.21 and $65.37, being 38.2% and 50% Fibonacci retracement levels.

We expect XLE to find support between these two levels. Therefore, we want to buy 50% of the allocation at the current levels and buy the next 50% on dips to $65. Once the ETF breaks out of $69, it should rally to $75 levels. Our initial stop loss will be at $61, which will be trailed higher as the trade moves in our favor.

Risks to our investment

We have forecast a huge increase in crude oil prices, as we believe that the markets are likely to be in a balance in the first quarter of 2018. However, if the OPEC members fail to extend the production cuts, crude oil prices will again slide back to $40 a barrel levels.

If the geopolitical situation remains calm, we may not get the breakout and rally to $68 levels. Also, if the tax cuts don’t happen or don’t meet street expectations, the stock markets are likely to crash. The Energy sector, being the weakest, will suffer.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 9 rated postsRakesh Upadhyay is a Technical Analyst and Portfolio Consultant for The Summit Group. He has more than a decade of experience as a private trader. His philosophy is to use technical analysis for momentum trading and fundamental analysis for long-term positions. Rakesh likes to keep himself fit by lifting weights and considers himself to be a spiritual person.




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Analysis

Boeing Still a Good Investment, but Not Now

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By Dmitriy Gurkovskiy, Chief Analyst at RoboMarkets

In one of our previous articles, we spoke about the rising demand of pilots and air transportation, which made us focus on relevant companies. Another important aspect here is aircraft, without which no air transportation is possible. So today, we’ll analyze one of the largest aircraft manufacturers out there, Boeing.

Boeing Company (NYSE: BA) is a leading aircraft, military and space equipment manufacturer. Headquartered in Chicago, IL, the company mostly operates in Seattle, WA. Boeing is among the top three military equipment companies in the US by the yearly order volume. Around 50% of the company’s budget accounts for military orders.

Over the last four years, Boeing’s yearly revenue is always somewhere near $90B, while the net profit is steadily growing.

Since 2014, the company’s equity was going down, with the debt growing at the same time, and thus the debt-equity ratio is currently not the best one.

Despite the debt, however, the investors get the dividends regularly, and those have been growing speedily since 2014: from $1.94 per share that year to $6.50 in 2018. Meanwhile, the growing demand led to Boeing supplying 763 aircraft in 2017. This was a record high, and the earnings went up from $4.985B to $8.197. The price per share also rose by over 100%, breaking out $300. In 2018, the company is going to supply 912 aircraft, or 20% more.

Boeing Contracts

Recently, Boeing got a contract for $62.7M which included maintenance and modification of F/A-18 и EA-18G. The contract is expected to be fulfilled by Sep 2019.

Another contract won by Boeing is worth $805M and includes developing, manufacturing, testing, and supplying for pilotless aircraft to the US Air Force by 2024.

The US Air Force also has yet another contract with Boeing, which is worth $9.20B and includes both aircraft and flight simulators. At the first stage, the company will get $813M to supply 351 Advanced Pilot Training aircraft and 46 simulators. The overall deadline is 2034.

This is just to name a few, and still one could clearly understand Boeing has orders for at least the next 10 years.

Boeing is also a significant player in the international military business; with the emerging countries increasing their budgets in the light of global geopolitical uncertainty, the company is sure to get more orders.

Apart from military aircraft, Boeing is planning to launch an air taxi prototype next year, which would carry passengers for short distances, while the company is also determined to create an air transport management system within 5 years.

All this makes the outlook perfect, with both dividends and share prices growing steadily. Technically, however, there is some extreme volatility, which shows investors are uncertain; some are closing their positions to lock in over 100% profit, others are, conversely, buying. This led to the price forming a wide range between $315 and $370. At this rate, it may well reach $400 and then bounce back to $300.

Technical Analysis

In 2016, Boeing shares started rising from $100, with the volumes growing, and reached the high at $350, i.e. those who bought at $100, started selling at $350. This means one should better wait for higher volumes and lower prices, as well as some good news, before buying, rather than going long straight away.

Alphabet Inc (NASDAQ: GOOG) experienced a similar situation, when the price was between $1,000 and $1,200, and then, when good earning reports came out, it reached $1,270. Then, Google shares went down again, and are now trading at $1,150, while being fundamentally very strong. So, it may start rising again soon, but at lower levels.

You remember an old saying ‘Buy rumors, sell facts’, of course. This is true with Boeing as well. The news on the company plans must be already priced into the shares, so before adding Boeing to your portfolio, you’d better wait for some lower prices.

Disclaimer

Any predictions contained herein are based on the authors’ particular opinion. This analysis shall not be treated as trading advice. RoboMarkets shall not be held liable for the results of the trades arising from relying upon trading recommendations and reviews contained herein.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 15 rated postsHaving majored in both Social Psychology and Economics, I went on to continue my education in post graduate. Later I worked as a team lead of a tech and fundamental analysis lab in the Applied System Analysis Research Institute. This helped me to acquire all necessary skills and experience to become a successful trader and analyst, as well as a portfolio manager in an investment company. I'm a pro in the financial field and the author of articles for various international media. I also hold the position of Chief Analyst at RoboMarkets.




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Stock Picks

Stock Pick: General Motors

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General Motors Company (GM) is an American multinational corporation that designs, builds, and sells automobiles such as cars, trucks, crossovers as well as automobile parts. Its most popular vehicle brands include the Buick, Cadillac, GMC, and Chevrolet.  Currently, GM has a workforce of 180,000 employees across 35 countries. In 2017, the company posted revenues of $145.59 billion.

Technical Analysis of General Motors (GM)

GM has been in a slump since June 2018 when it respected resistance of $45. In as little as four months, the stock lost over 23% of its value. At first glance, it might appear that GM has some more downside potential. A close look, however, reveals that GM is due for a bounce. That’s when our play can come in.

Technical analysis shows that GM is approaching the uptrend support of $33. This support has never been breached since July 2012. Bulls have managed to defend it multiple times and that tells us that they’ll also do the same this time.

On top of that, we can see on the weekly RSI that GM is nearly oversold. This gives us confidence that we can expect some selling relief soon. The oversold conditions plus the increased demand at the support can be the catalysts of a strong rally.

Fundamental Analysis of General Motors (GM)

In addition, we have fundamental analysis to support our bullish view. GM’s trailing twelve month price to earnings ratio is 5.51. The stock is undervalued considering that the PE ratio TTM of the automotive – domestic industry stands at 12.39. The comparison tells us that GM has good upside potential.

Also, our research shows that GM is a fundamentally strong company. In its second-quarter report, GM’s US sales volume was up 4.6% year-over-year. Additionally, sales volume in China was up 4.4%. Lastly, a look at the firm’s income statement shows that GM’s earnings before interest, taxes, depreciation, and amortization (EBITDA) growth rate in the last five years was 17.40% per year. This tells us that the company is generating a lot of revenue at a high growth rate.

The firm’s net income may be suffering due to some external challenges but the figures show that GM continues to deliver solid results. Eventually, these results will be reflected in the stock’s price.

The strategy is to buy as close to $33 support as possible. If bulls can successfully defend the support, then GM might be able to rally to our target of $40. Sell immediately once the target is hit. Keep in mind, we are just playing for the bounce.

The timeline for the target is less than six months.

Weekly GM Chart

Monthly GM Chart

As of this writing, the General Motors Company stock (GM) is trading at $32.65.

Summary of Strategy

Buy: As close to $33 support as possible.

Target: $40

Stop: Close below $32.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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3.6 stars on average, based on 249 rated postsKiril is a financial professional with 4+ years of experience in financial writing, analysis and product ownership. He has passed all three CFA exams on first attempt and has a bachelor's degree with a specialty in finance. Kiril’s current focus is on cryptocurrencies and ETFs, as he does his own crypto research and is the subject matter expert at ETFdb.com. He also has his personal website, InvestorAcademy.org where he teaches people about the basics of investing. His ultimate goal is to help people with limited knowledge of finance and investments to create investment portfolios easily, and in line with their unique circumstances.




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Analysis

Investors Getting High on Cannabis

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By Dmitriy Gurkovskiy, Chief Analyst at RoboMarkets

A year ago, you would hardly find even the most financially illiterate person in the world that had not heard of Bitcoin or cryptocurrency. Regardless of whether they know what it was — at least they know you can earn money with it!

Opportunities to earn easy money sometimes do appear, but they do extremely rarely, and in this light the crypto boom is often compared to the tulipmania that happened in the 17th century. At that time, speculators with no experience joined the tulip futures trading, which eventually led to a sharp increase in flower bulb prices, while a year later the overheated market collapsed, bringing huge losses to all.

The chance to earn huge profits for people who do not have a close connection with the markets does not appear so often. But for those who work with stocks, such opportunities arise almost every quarter.

The price of bitcoin at the peak of its popularity, when almost everyone knew about it, went up by 2,000%. In the stock market, some companies can yield a return of 1,000% within a week or a month, and there is no need to wait a whole year around.

The last sharp increase in share prices after an IPO, which broke all records this year, was shown by Tilray. Since the IPO on July 19 this year, the stock yielded a return of 1,300% over 2 months, and for those who follow the IPO, there was plenty of time to buy this stock, as the price was at about $20 for about a month.

Tilray is a Canada-based company specializing in cultivation and sale of medical marijuana to consumers and pharmaceutical distributors.

When a stock experiences such a rise, however, it usually falls afterwards, and Tilray was no exception as it lost 50% of its maximum value, although it continues to trade at 600% higher against the initial IPO price.

2018 was a landmark for marijuana manufacturers, as in January California legalized the use of marijuana for recreational purposes. Currently, medical marijuana products can be consumed in 29 US states. It is expected that, by 2022, the marijuana market in the US and Canada will have grown by more than three times.

Tilray is a clear indicator of investors’ interest in such companies. However, it’s not just traders who are interested in marijuana producers. Constellation Brands, one of the largest beer producers in the US, announced its intention to invest $4B into Canopy Growth, another Canadian company. This will allow it to increase its share in Canopy Growth from 8.70% to 38.00%. In the next 3 years, the US company will get the right to buy another 139.7M shares for $3.5B, thereby increasing its stake to the controlling one.

Meanwhile, Microsoft has partnered with the Kind Financial, a US based startup company which develops software for government agencies that control the production and sale of marijuana.

On September 17, rumor had it that Coca-Cola was negotiating with Aurora Cannabis to create a beverage containing cannabis. Most likely, this drink will be used to reduce inflammation, seizures, and as an anesthetic.

All this confirms the interest of large companies and investors in marijuana manufacturers. At this rate, finding a marijuana company and investing your money in it could seem a good idea, but there is a risk of high volatility, just like in case of Tilray, which can put your deposit under serious threat. An easier way would be investing in an ETF with the same companies stocks.

The most interesting ETF in the marijuana industry is ETFMG Alternative Harvest (NYSE: MJ).

According to some sources, since August 22, this fund recorded a cash inflow of $112M, which is about 20% of the total value of its entire portfolio. With the money supply growing, the trading volumes increased up to 10M shares, which is 3 times higher than the volume in July.

The interest towards this ETF was especially frantic when California passed the law early this year: at that time, ETF MJ price rose from $29 to $39. Then, in March, the price tried to go up further, but the volumes stayed low, so the price had to get back and even sank a bit. It was only in August when $27 got broken out, and then the price went well up to reach $45, this time also with increased trading volumes. Currently, the support levels are at $34 and $39. Given the increased volatility, the price is quite likely to go down to $34.

ETF investment has always been considered less risky, and in case we are now on the brink of a marijuana boom, this ETF is certainly going to be the best investment vehicle.

 

Disclaimer

Any predictions contained herein are based on the authors’ particular opinion. This analysis shall not be treated as trading advice. RoboMarkets shall not be held liable for the results of the trades arising from relying upon trading recommendations and reviews contained herein.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 15 rated postsHaving majored in both Social Psychology and Economics, I went on to continue my education in post graduate. Later I worked as a team lead of a tech and fundamental analysis lab in the Applied System Analysis Research Institute. This helped me to acquire all necessary skills and experience to become a successful trader and analyst, as well as a portfolio manager in an investment company. I'm a pro in the financial field and the author of articles for various international media. I also hold the position of Chief Analyst at RoboMarkets.




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