Betting on an Oil Bull

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

Global markets saw a sixth consecutive week of gains, with the Dow Jones up 1.21%, the S&P 500 rising 1.11% and the NASDAQ jumping 0.67%. The MCSI Emerging Markets Index also gained 0.98%.

Big gainers in your portfolio included the Direxion Daily CSI 300 China A Share Bear ETF (CHAD), which rose 2.84%.

You were stopped out of your position in Skyworks Solutions (SWKS) for a 10% gain. SWKS May $65 Calls next traded at $9.02 after the stop out for a 55.52% gain. Whenever an equity position stops out, remember to sell your options as soon as possible.

As its name implies, Bull Market Alert is all about identifying bull markets across financial markets.

And after the recent sharp rally, several markets have now met the technical definitions of a “bull market” — that is, they have risen 20% above their previous lows.

Today’s bull markets include a motley crew of gold, Brazil and this week’s Bull Market Alert recommendation of oil through United States Oil (USO).

Here’s why I expect the worst for oil to be behind us.

First, Russia and Saudi Arabia have gathered global oil producers behind a freeze in a coordinated effort to stabilize prices. As a result, daily production outside OPEC is expected to decline by 750,000 barrels this year, or 150,000 barrels a day more than estimated last month. Output losses in Iraq and Nigeria, as well as slow production restoration in Iran, also are paving the way for higher prices.

Second, as I noted above, oil is now technically back in a bull market. After hitting a 12-year low in mid-February, oil has rallied to close above $38.00. USO itself has reflected this move, rallying from $7.96 to a close of $10.19 on Friday. And in bull markets, the “trend is your friend.”

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Finally, after the worst start to the year in history, global financial markets have settled once again. China’s central bank ramped up liquidity injections and moved money market rates lower, with Governor Zhou Xiaochuan highlighting the scope for further actions if needed. And on Thursday, the European Central Bank launched a larger-than-expected stimulus which included a series of rate cuts, additional bond purchases and ultra cheap loans for banks.

All of these factors combine to be bullish for oil in the months ahead. And a recovery to a more normal level of $50 per barrel could represent a 30%+ gain in USO. And as the chart below shows, there is room to go much higher.

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So buy United States Oil (USO) and place your stop at $7.90.

A word of warning…

Oil is now technically overbought and may pull back in the coming days. That’s why I am holding off on recommending options until a more appropriate point of entry.

Portfolio Update

Direxion Daily CSI 300 China A Share Bear ETF (CHAD) rose 2.84% over the prior trading week. Although emerging markets have entered a positive trend, China continues to be a spoiler at the party. The Institute of International Finance recently pegged 2014 total emerging market net capital outflows at $111 billion. Fast-forward to last year, and the number jumps to a whopping $735 billion. The bad news (for China) is that about $676 billion of that figure stemmed from China repaying its foreign currency obligations to help bolster its currency, the yuan. CHAD remains a positive holding in the portfolio, but stands just shy of its 50-day moving average (MA), rating it as a HOLD.

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Phillips 66 (PSX) added 0.76%. PSX took a breather last week after a strong gain the week prior. Oil closed out its fourth winning week in a row last week, keeping the tailwinds blowing for PSX. Oil prices may also see a significant secondary boost as unwinding short-covering further boosts prices. PSX is a BUY.

Kinder Morgan (KMI) gained 0.54%. Like fellow energy sector play Phillips 66 (PSX), KMI also paused last week. According to Zacks Investment Research, several analysts share in Warren Buffett’s enthusiasm for KMI. Six analysts have assigned KMI a “Hold” rating, one has set a “Buy,” seven have a “Strong Buy” rating, and none are willing to call KMI a “Sell.” KMI is a BUY.

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Nicholas Vardy

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