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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

Traders Buying Activision Blizzard Options

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By Dmitriy Gurkovskiy, Chief Analyst at RoboMarkets

With the S&P 500 having recovered most of its Christmas losses, there are still stocks that have not even started to move away from their lows. Today we are going to analyze one of those.

Activision Blizzard (NASDAQ: ATVI) is a US based company that produces and sells game consoles, PC and mobile gaming content. Headquartered in Santa Monica, CA, ATVI is one of the largest gaming and entertainment companies in the world. It was founded in 2008 after the Vivendi Games and Activision merger, and currently owns such brands as Call of Duty, Quake, and World of Warcraft, among others.

In the last 6 months of 2018 ATVI experienced its most negative period in history, having lost around 50%.

Fundamentally, this was sudden, as all quarterly reports exceeded expectations.

The chart shows revenue went down in early 2018, but this is okay given the seasonal factor, and Q4 is sure to yield nice profits to ATVI.

With the reports being so good, then, what made the stock plunge so much? First, the market went down overall, but there were some other reasons, too. One of them is the lower expectations on Q4 2018 earnings. They were first forecast at $3.06B, but in November, the company lowered them down to $3.04. Another reason was the news of fewer users in Q3.

Then, four top managers got fired, including the CEO and president, as they were unable to create a new game during 2018; this was followed by Michael Morhaime, the former Blizzard CEO, leaving the company. He stopped being president in October and became an adviser, but he will definitely have left by April 2019.

Done with firing? Not really. In February, someone let slip the company is getting ready for a massive job cut, firing over 100 employees, in order to reduce costs.

Breaking off with Bungie added fuel to the fire, with the stock plunging by 7%. Activision Blizzard and Bungie worked together on Destiny, but this did not prove fruitful. In November, Activision Blizzard provided Destiny 2 for free just to ramp up the number of users, which means the sales were not very good. At Bungie, however, people reacted positively, as they were very happy to get rid of the strict Activision Blizzard schedule.

For ATVI, however, this not only caused the stock to plunge, it may have also led to trials initiated by investors. A few companies are already considering legal action because of the loss of potential profits. All these negative reasons are still keeping the stock near its lows. The reasons are already priced in the market, though, as the news on legal actions were known in January, while the firing campaign may be good for the company.

In December, we mentioned General Motors (NYSE: GM), where the management decided to cut jobs, and the stock went finally up, forming an uptrend.

Once Activision Blizzard is able to reduce costs, this may happen to this company as well. The market is expecting a positive Q4 report, which may change investor sentiment, which is now negative.

The P/E is currently at 17.54, with the average being 18.91, which means the stock does have some potential.

With such a large stock fall, the short float is quite low, 2.23%, meaning there are few people who want to capitalize on the fall.

Another important factor that may signal a rise is the news on buying 16,000 call options at $46, with the expiry on Feb 15. Traders have to pay a premium in order to buy options, and the price must rise above the strike ($46 in this case) for them to get profits; this means the price is very much expected to rise above $46 by Friday.

Technically, there is a descending trend, with the price being below the 200-day SMA. Once the price approaches $45, however, the volumes go up, which shows the traders’ interest.

A good report may well push the stock above $50, but the price should stay there for a while before one could start taking midterm longs. The target may be at around $65 or $70.

Those who bought calls hoped for a good report, but the options will expire in a couple of days (or sooner), and this support will come to an end. In order to understand whether one should continue holding longs on ATVI, one should monitor the number of new users and management speeches. The rising number of users may change the current negative trend, and, in this case, even the legal actions won’t be a big deal.

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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4.7 stars on average, based on 30 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 Pick: Foot Locker Inc. (FL)

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Foot Locker Inc. (FL) is an American retailer of apparel and shoes. The company operates 3,270 stores in 27 countries in North America, Europe, and Asia. These stores come in various formats, including Foot Locker, Kids Foot Locker, Lady Foot Locker, Champs Sports, Footaction, Runners Point, Sidestep, and SIX:02. As of January 2019, the company has 15,141 employees.

Technical Analysis of Foot Locker Inc. (FL)

We like FL because it is one of the few S&P 500 stocks that has gone through a major correction and is now showing signs of reversal. After printing an all-time high of $79.43 in December 2016, the stock showed signs of bullish exhaustion. The combination of bearish divergence and a double top pattern was enough to drive FL to as low as $28.42 in November 2017.

From that point, the stock bottomed out and started its reversal process. Over a year later, we believe that FL might have reversed its trend.

Technical analysis shows that FL has breached resistance of $52 in May 2018. This triggered the breakout from the inverse head and shoulders pattern on the weekly chart. While the stock pulled back and went below $52 in July 2018, the stock remained bullish. After all, it printed a higher low setup of $44.47 in October 2018.

With a higher low in place, FL once again took out resistance of $52 and climbed as high as $58.67 this month. Now, the stock is facing resistance at the 200 moving average on the weekly chart. The expected pullback will likely send FL down to $52 and flip the resistance into support.

Fundamental Analysis of Foot Locker Inc (FL)

In addition to our technical analysis, fundamental analysis also backs our bullish view.

The third-quarter 2018 performance of Foot Locker Inc. beat analyst estimates. Analysts projected that FL will print sales of $1,846 million yet the company generated total sales of $1,860 million. Also, analysts projected earnings per share of 92 cents. However, the company came out with surprising quarterly earnings of 95 cents per share.

Lastly, the trailing twelve months price-to-earnings ratio (PE ratio TTM) of FL is 12.85. The stock is undervalued considering that the PE ratio TTM of the apparel and shoes industry is 14.42. On the surface, the difference might not be significant. However, if you take into account that the four-year maximum of FL is 19.13, then it becomes more apparent that the stock has more room to grow.

The strategy is to be patient and buy on dips as close to $52 as possible. As long as bulls hold this level, FL will likely generate the momentum to bounce to our target of $72. Take that out and the next target is $78.

The timeline for the target is more than six months.

Weekly FL Chart


Monthly FL Chart

As of this writing, the Foot Locker Inc stock (FL) is trading at $56.68.

Summary of Strategy

Buy: On dips as close to $52 as possible.

Targets:  $72 and $78.

Stop: Close below $49.50.

 

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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3.8 stars on average, based on 327 rated postsKiril is a CFA Charterholder and financial professional with 5+ 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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High Risk, High Yield

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By Dmitriy Gurkovskiy, Chief Analyst at RoboMarkets

After Donald Trump became President he told investors it was he who made the stock market rise. When the market went down, however, most blamed Trump again.

In 2018, the indices reached their highs and started correcting, which meant the ascending trend faded out and the market needed a new driver to start going up again. The US is taking on a new election in 2020, and until then Trump has to create that driver for the market in order to win it. And indeed, he does have a few silver bullets to support the national economy.

The Sino-US trade wars were unable to stop the market rise at once, but sped up the reach of the highs. With the ceasefire achieved, the market went positive, as the customs duties finally started spoiling companies’ earning reports.

The tech companies were the first to suffer. Thus, Apple reported iPhone sales declines, which according to Tim Cook, happened because of the trade war.

If the US-China relations improve in the nearest future, this will help the stock market to rise again – a good move for Donald Trump. While imposing duties was quite quick, lifting them will surely require a lot of time; this will push news on various agreements between the US and China into the market, and that will help  prices to start rallying again.

With the tech segment suffering most of all, it would be reasonable to assume its rising potential is also quite high.

Among the techs, Apple is of course in focus, as it’s a leading company here. Previously, iPhone sales decline could be explained with the trade wars, but now there’s also Qualcomm that, through legal actions, managed to ban selling iPhone products in China and Germany because of patent infringements. Apple, however, is still selling iPhones in China, even at risk that its representatives may get arrested. This is why Q1 report may fall behind the expectations, and the stock may get pushed down again. The price may fall to $140, and only positive news on Qualcomm claims may change the situation to the better.

Apart from Apple, the tech sector has a lot of companies, and each of them may react differently to the improving Sino-US relations. The corporations where most revenues come from China are first to win, of course.

One of such is Skyworks Solutions (NASDAQ: SWKS), which produces mobile network components. 83% of SWKS revenue comes from China. Its P/E is 9.70, while the average figure in the tech sector is 26.30, meaning Skyworks is very much underpriced. If the US and China come to an agreement, this company is very likely to increase its revenue and get investors’ attention. Ironically, the major risk is again Apple, as this company’s orders constitute around 40% of Skyworks revenue. If, however, Apple sales are able to start rising again, Skyworks will benefit from both factors.

Whenever the price breaks out of $70 and stays above, the price could rise further to $90.

Broadcom (NASDAQ: AVGO) has over 54% of the revenue coming from China. It is an integration microchip producer that is among top 20 semiconductor selling companies. It’s P/E is 12.60%, slightly higher than that of Skyworks Solutions, but still far behind the 26.30 average.

Broadcom also depends from Apple’s orders, but its share is just 20%, so the risks are lower. Still, a slight decline in revenues is expected in Q1.

Broadcom’s outlook is overall better than that of Skyworks. Technically, the price is above the 200-day SMA, and there’s an uptrend forming. When the entire market was falling at Xmas, Broadcom barely reacted, which signals the positive investor sentiment.

Once the price goes above $270, the stock may then rise to $300.

One of the most underpriced tech companies is Micron (NASDAQ: MU), another semiconductor producer that mainly makes RAM modules, SSD drives and CMOS detectors.

It’s ‘Chinese’ share is 51%, while the P/E is at 2.90, compared to 26.30 average. Over the last six months, the earnings reports showed the highest revenue, while the stock price was going down, just because of the RAM and flash drive supply and demand imbalance. The market is still oversupplied with these devices, and Micron is expected to lose revenues for the following two quarters as well. In Q4 2018, the earnings already fell by 6% QoQ.

Considering the above, Micron decided to increase its production by only 15% instead of 20%, as planned before, which will allow it to decrease the supply. Samsung is also planning to decrease its memory card production in order to slow down the price fall. By Q3 2019, the demand for memory devices is expected to rise again, and the price should recover.

The financial market is all about expectations, and, in this case, the decrease of memory devices demand is already priced, this is why Micron stock have fallen by 50% for the last six months. The current price may prove to be the best for going long.

When $34 got broken out, the volume increased sharply, which is the first sign of the reversal. The stock is currently trading above $36, and in case it stays there, it may go as high as $50 per share.

Each of the above companies is facing some issues, which are bound to get resolved sooner or later. Still, all of them have the same problem: the Sino-US trade war that prevents them for recovering and rising. Once the relations between the two countries get better, the game is sure to change a lot.

The key risk factor here is Donald Trump being very unpredictable. However, the potential yield is quite high, too.

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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4.7 stars on average, based on 30 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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