Stock Picks

Buy XLE to Benefit from the Likely Uptrend in Crude Oil

Published

9 months ago

October 25, 2017

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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

We expect crude oil prices to rally
Tax reforms are likely to be positive for energy companies
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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Rakesh Upadhyay

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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Stock Picks

Stock Pick: Oracle Corporation

Published

6 hours ago

July 17, 2018

Kiril Nikolaev

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Oracle Corporation (ORCL) is a company that specializes in developing database software and technology as well as cloud engineering systems and enterprise software products. In terms of revenue in the software-making industry, Oracle comes second to Microsoft with sales figures reaching up to $39.83 billion in 2017. Also in 2017, the company had over 138,000 employees serving 430,000 customers in 175 countries.

Technical Analysis of Oracle Corporation (ORCL)

ORCL started its bull run in June 2009 when it took out resistance of 20.00. This triggered the inverse head and shoulders reversal pattern on the daily chart. Since then, the stock has been generating a series of higher highs and higher lows in a predictable manner.

A quick look at the charts of ORCL reveal a strong and sustainable uptrend. The stock climbs until the monthly RSI flashes overbought readings. It then retraces until it drops near or at RSI support of 30 – 40 on the weekly chart. The process has been repeated numerous time in the past nine years. There’s no indication that the uptrend will be over soon.

Technical analysis show that ORCL has taken out resistance of 46.00. This triggered a small cup and handle reversal structure on the weekly chart. However, a closer look at the monthly chart reveals that 46.00 resistance stood for 18 years. This explains why the stock struggled for a year to stay above it. Fortunately, ORCL has recovered the territory as it recently managed to spark a rally to 48.

Furthermore, technical indicators are showing bullish signals. The weekly MACD recently flashed a bullish cross. Plus, the weekly RSI bounced from support of 40. Also, the 4-day, 8-day, and 21-day moving averages are trending up.

Weekly ORCL Chart

Monthly ORCL Chart

As of this writing, the Oracle Corporation stock (ORCL) is trading at 48.46.

Fundamental Analysis of Oracle Corporation (ORCL)

On top of the technical analysis, fundamentals offer some support to our bullish outlook. ORCL’s trailing twelve months (TTM) price to earnings ratio (PE ratio) is 56.35. The stock appears overvalued. However, it has a five-year maximum of 64.60. This tells us that investors are willing to pay a premium for ORCL shares.

In addition, CNBC reports that Oracle’s quarterly results beat expert estimates. Analysts predicted that the company would generate revenues of $11.19 billion and a profit of 94 cents per share. However, Oracle posted revenues of $11.25 billion and an earnings per share of 99 cents.

The strategy is to buy on dips as close to 46.00 as possible. If bulls can stay above this level, it’s all blue skies for ORCL. There’s no known resistance above 46.00.

Initial target is 56. However, the stock could go as high as 82 in the long-term.

The timeline for the initial target is three months. The target of 82 may take more than a year.

Summary of Strategy

Buy: As close to 46 as possible.

Target: 56 first and then 82.

Stop: Close below 44.

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Kiril Nikolaev

3.6 stars on average, based on 201 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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Stock Picks

Stock Picks: Ford, Marvel Technology, Qorvo

Published

7 days ago

July 11, 2018

Dmitriy Gurkovskiy

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By Dmitriy Gurkovskiy, Chief Analyst at RoboMarkets

Below are the latest stock picks for July 10, 2018.

Ford (NYSE:F)

Ford Inc. is a US automotive company founded by Henry Ford back in 1903. Currently, it is in fourth place by the number of cars manufactured ever, after General Motors, Toyota, and Volkswagen.

Ford Inc. owns Troller, the Brazilian SUV brand, as well as 8% of Aston Martin (UK) shares and 49% of Jiangling Motors (China) shares. Additionally, Ford is involved in a number of joint companies, such as Changan Ford in China, Ford Lio Ho in Taiwan, Ford Otosan in Turkey, and Ford Sollers in Russia.

On June 7, the company announced its sales had fallen significantly in China. Compared to last year, the demand decreased by 38%, reaching just 62,057 cars. General Motors, on the other hand, managed to boost their sales in China by 4.4% over the same period.

China is overcrowded with car manufacturers, both small ones and large, with the competition being fierce. At this rate, the winner is the one that can update the model range on time and meet the average Chinese customer needs.

In 2015, Ford started selling Kuga (Chinese version of Ford Escape), and consumers got quite interested in it, with as many as 67,767 cars sold within 6 months. The company assumed the demand would stay the same, and just re-styled the exterior design a bit, but eventually, this was not enough. As such, in the first half of 2018, only 25,155 Kugas were sold, as the average consumer already considered it outdated and found some more innovative solutions in other companies.

Ford management say they were ready for this failure and launched new Mustang and Ranger Wildtrak sales in order to keep the demand high. Besides, they are going to present new Ford Focus and Ford Escort later this year, which could also boost the sales. By 2025, Ford want to launch 50 renewed or whole-new models.

This could well help to recover the sales indeed, but for the force majeure obstacles created by Donald Trump. The US President initiated a trade war against China, which lead to increased customs duty for both cars and farm machinery. In this situation, the only hope for investors is Changan Ford, a joint company that could boost the sales again and make them reach the previous results. Further on, automotive companies will have to take some measures regarding in-depth local marketing strategy in China, in order not to lose this market totally.

China has already increased car customs duties, but this is not the only bad news for the US automotive companies. If the trade war continues, the EU may blow another strike against them, by imposing the same duties.

An old joke says a businessman can start a successful company and many jobs even in the middle of a desert, but if the government comes in, the results will be totally unpredictable. This is what is actually happening now, with the government actively trying to ‘help’ businesses.

The current situation does not allow any conclusions, and whenever an investor is in doubt, the best option for them is cash.

Technically, Ford is experiencing a downtrend, with the price being below the 200-day SMA. The trendline that was supporting the price since February is already broken out, which is a negative signal.

The most recent resistance is at $11.60, and in case the price bounces off it, it may well go further down. The downtrend is now prevailing, but at the same time the Short Float is quite low, at 3.18%, which means few traders want to be bullish right now.

Marvel Technology Group (NASDAQ:MRVL)

Marvel Technology Group was founded in 1995 and is based in Santa Clara, CA. The company focuses on data storage devices, high performance processes, broadband and wireless transceivers, memory controllers, and LED processors. The company was also responsible for supplying Wi-Fi chips for Apple iPhone 1. Currently, Marvel produces over 1 billion chips per year.

Last week, Marvel finalized its merger with Cavium Inc., a semiconductor device and system-on-chip producer. This merger will lead to the birth of a leading semiconductor manufacturer offering unique data storage and processing devices, wireless devices, and security products to its customers.

The board is expecting a rise in demand from automotive manufacturers that are in need of high processing speed and low energy consumption.

After the Cavium acquisition, Marvel got three new directors on the board: Syed Ali, Brad Buss, and Dr. Edward Frank.

Syed Ali was the Co-founder, President, Chief Executive Officer, and the Board Chairman in Cavium Inc. since its inception.

Brad Buss was a Director at Cavium since 2016, serving as a Financial Director at Cypress Semiconductor and Solar City before. Currently, he is also a member of Tesla Motors and Advance Auto Parts Boards.

Dr. Edward Frank also has been a Director at Cavium since July 2016, being also the co-founded of Cloud Parity, a startup company. Before that, he was the Vice President at Macintosh Hardware Systems Engineering, Apple. He also served as an R&D Vice President at Broadcom Corporation.

Technically, flat correction is coming to an end on W1, which could mean that uptrend will be continuing.

On D1, the price attempted to break out the 200-day SMA top down, but was unable to. This attempt occurred on June 25, after which the volumes went up and the price recovered, which can be easily explained by the investors trying to buy at a better price. There’s also an obvious support at $20.00, which was tested three times and was never broken out.

Short Float is the only thing that may make the investors wary, as it is quite high and is at 11.72%. There’s another thing, though: the insider sales in June amounted to $219,980.

Qorvo (NASDAQ:QRVO)

Qorvo Inc. is a relatively young company that appeared in 2015 after Tri Quint Semiconductor and RF Micro Device merger. It is headquartered in Greensborough, NC. This is a semiconductor manufacturer that creates and sells radio systems and app solutions enabling wireless and broadband communication. In June 2015, Qorvo became a part of the S&P 500 Index with a value of $12 billion. Currently, over 8,000 people are employed with Qorvo.
Last week, the investors got interested in this company as its shares went up sharply, appearing among the S&P 500 leaders. On July 5, Qorvo shares went up as much as by 5.60%.

Still, there is nothing special about the company, with this growth being totally based on good financial reports and the ever-high demand on Apple phones in China. Qorvo is a major supplier of iPhone parts, so this is what really makes difference for it.

The Board set a goal to increase its market share across Chinese smartphones and boost the EPS to $6.40 by 2019.

On D1, there is an uptrend, where the 200-day SMA acts as a support. The most recent resistance is at $85.00, and once it’s broken out, the price may reach $90.00.

Disclaimer

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

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Dmitriy Gurkovskiy

4.6 stars on average, based on 4 rated postsHaving majored in both Social Psychology and Economics, Dmitry went on to continue his education in post graduate. He then worked as a team lead of a tech and fundamental analysis lab in the Applied System Analysis Research Institute. This helped him to acquire all necessary skills and experience to become a successful trader and analyst, as well as a portfolio manager in an investment company. Dmitry is a pro in the financial field who authors articles for various international media. He also holds the position of Chief Analyst at RoboForex.

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Stock Picks

Stock Pick: Coca-Cola

Published

2 weeks ago

July 3, 2018

Kiril Nikolaev

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The Coca-Cola Company (KO) is company that needs no introduction. They are the manufacturers of the most popular soft drinks in history: Coca-Cola. Founded in 1886, the initial servings of Coca-Cola sold for 5 cents per glass. In its first year, the company had average sales of nine servings per day. 132 years later, that number has gone up to an estimated 1.9 billion servings globally per day. Coca-Cola has 61,800 employees with revenue of $35.41 billion in 2017.

KO started its bull run in December 2010 when it took out resistance of 32.00. This triggered the rounding bottom pattern on the weekly and monthly charts. From that point, the stock has been generating a series of higher highs and higher lows in a slow and steady manner.

Looking at the chart, KO is a great example of a stock in a strong uptrend. It usually creates a solid base before making a move up. Once the stock is overbought, it pulls back. KO then creates a higher low where it consolidates for some time before repeating the same process. This has been going on for over seven years and there’s no indication that it will stop anytime soon.

Technical analysis show that KO is ripe for a bounce. This view comes afters bulls worked hard to keep the stock above 42. The price action keeps the stock’s long-term support intact. On top of that, KO also respected the weekly RSI support of 36. This support area has never been breached since 2010 when the stock started its uptrend.

Furthermore, technical indicators are showing bullish signals. The MACD recently flashed a bullish cross. Also, the 4-day, 8-day, and 21-day moving averages are below the weekly candle’s body and are trending up.

Moreover, fundamentals support our bullish outlook. KO’s trailing twelve months (TTM) price to earnings ratio (PE ratio) is 22.44. The stock appears fairly valued but it went as high as 25.408 this year at about the same time it started to correct. While the stock was pulling back, it was generating revenues that beat expert analysis.

CNBC reports that the company posted 47 cents earnings per share compared to the 46 cents earnings per share predicted by Thomson Reuters. On top of that, KO generated revenues of $7.6 billion, which is significantly higher than the $7.34 billion forecast by Thomson and Reuters. The company is performing better than expected while its stock is taking a hit.

The strategy is to buy on dips as close to 42 as possible. If bulls can defend the long-term support, they will attract the momentum they need to push the pair to our initial target of 50. Sell immediately because based on the trend, the stock is likely to pull back from that price level.

The process may take more than six months.