Oil: short-term bouncing back is expected

I have predicted and repeated a few times in the past few months that oil would likely plunge from its high of over $100. Sure enough, in just a short few weeks, it has plummeted like a rocket stone with 20% chopped off. Yesterday, it further dropped below $80, a significant support level. Has it done its froth-removing work? I don't think so. I think there is a good chance that it will further decline to low $70s before its correction is done. But does that mean this is a straight way down? Actually I'm betting now that oil will likely quite significantly bounce back in the very near term before resuming its downturn. Below is the USO (oil ETF) chart. As you can see, it has dropped almost 20% below its 200 day moving average (red line). I'm not sure if you have heard a phenomenon so-called "reverse to mean". It means naturally when something is too far away from its average (mean), it tends to come back to the mean before moving away again. A 20% gap below (or up) from its 200 day moving average is quite significant and almost always it will move towards the average as the next action. So I'm willing to bet against the herd for a quick & sharp bouncing up for the oil price.One leverage way to do so is to buy the call options of an ultra oil ETF, UCO (2 x leverage). Using a call spread, the risk/award ratio could be as high as 1:4.

 

Arena: a potential 5:1 speculative bet

Arena (ARNA) is one of the famous small biopharma companies, focusing on developing weigh-loss drugs. It has tried for years and the most recent one was last year when the FDA turned down their application also. However, they are coming back again and believe or not, this time they got the FDA advisory board 18 to 4 backup for approval. So there is a good chance that this time they may be lucky enough to get their drug approved. The expected decision is Jun 27. So the ARNA stock just keeps shooting up in the past few weeks, almost a straight line up (see below)

Of course, I'm not predicting they will fail but what if just in case the FDA turns them down again? After all, it is not a miracle drug and still has some safety concerns. If indeed ARNA gets a negative ruling, its shares will plunge to where it was around $2-3. So if you are a risk-taker, you may want to buy some put options to bet against the most of the herds. The risk-profit ratio could be as high as 1:5 or even more. It sounds an interesting risk to take to me.

What’s to expect in the next few weeks?

Well, today's is the D day for the Eurozone countries, since the Greek election will largely determine whether there will be an immediate collapse or crisis facing them. In reality nothing will immediately happen but at least this is how it is perceived for its impact. All the evidence indicates though that the Greek people at large don't want to leave the Eurozone although they really hate the austerity plan. I think the election result will give such an impression that Greece will stay and the Euro will not break up immediately. Everyone will be deeply relieved and the market will view this as a huge positive. While the can is kicked further down the road and the crisis will become even bigger and worse later, no one wants to face the reality now. It is the problem of future leaders and politicians, not today's.

As I said recently, I had a hunch that the overall market would likely be doing well in the near short-term. Therefore I have put in some money with SSO (2 x leverage) and TNA (3 x leverage) to speculate this idea of a short term market rally. I’m still thinking this will likely play out as I predicted that the overall market will be advancing up for the next few weeks, especially if the Fed is doing or at least hinting that they will start to further stimulate the economy at their meeting next week. The obvious initial significant resistance for S&P will be around 1370-90. At the current level around 1340, it is not too late to take some speculative positions if you are also convinced with this near term trend. But be aware that this is highly speculative and very risky. If we indeed go up & over 1370 luckily, I will be thinking to take the money off the table to be ready for the next leg down. I think this market correction is not over yet and another test of the May low will follow the current short lived uptrend. Only after that, the market will be ready for a more sustainable rally towards the year end. Simply accumulating more cash is also a good strategy to be ready to join a more solid and significant market rally.

Stillwater mining (SWC) is close to a good buy

Platinum, a more rare precious metal than gold, has been lagging behind gold in price for quite some time. I talked about it a few months ago that I believed its price will sooner or later catch up and come back to its historical level that is more expensive than gold. It has happened yet and this is actually the best time to buy platinum for long term if you have a longer investment horizon. Patience is the key.

One may directly invest in platinum by buying its ETFs, e.g. PPLT or PALL for its alternative, palladium. But I personally like the platinum mining companies better, which is one leverage way to follow the trend. Of course, it is a double edged sword when the company is not performing well that you may get hurt more pronouncedly. SWC is one of the largest mining companies for platinum and palladium. SWC got fire towards the end of last year and early this year, when I was discussing about investing in platinum. It jumped up about 50% or so within a short few months period of time. Clearly people had got too much excited and pushed it way ahead of itself. In the past few months, SWC has given back all and even more. At the currently price around $8-9 or so, I think it is has some great value in it. I’m still a firm believer that platinum will come back to where it should be. If so, I really think SWC will be doing quite well along this trend. I cannot say and no one can be sure if this is its absolute bottom but I like the risk-benefit ratio here from the long-term perspective.

Is Euro saved?

You may have heard that the Spanish banks will get 100 billion euros ($125 billion), a bail out to save them. The market futures across the world immediately got lifted when the news came out. When I drove to work early morning today (I usually go to work very early before 6 AM), the Dow and S&P futures were up over 1%. I couldn't help but laughed and asked myself: has Euro been saved by this bailout? We had seen a very similar scenario less than a year ago when Greece got bailed out. Same euphoric  reactions we saw from the market that it seemed everything was fine after that. But in less than a year, Greece is going into a more dismal situation as I'm writing. Nothing will change this time. In a very simple way to decipher this bailout to see what has been really resolved: basically the Spanish government will get the money and then give the money to the troubled Spanish banks and the banks then use the money to buy the Spanish government bonds, which have become more and more difficult to sell in the open market. The fundamental problem of the debt crisis is still there without any real solution. Of course, with this bailout money, the immediate collapse of the Spanish banks can be avoided, just like Greece did not immediately kaput less than a year ago. But it actually only makes the whole situation even worse down the road. However, the market has become extremely short-sighted now. They only care about what is the immediate outcome. So I still bet the Euro will actually appreciate against the US$ over the next few months before resuming a more worrisome plunge. By the way, the stock markets today actually plummeted significantly towards the closing. So some rationality may still exist among investors.

By the way, I had an interesting bet with my son, who just graduated from the prestige Haas Business School of UC Berkeley and is now in Brazil for his last summer job with an investment company before starting his permanent job with PIMCO in August in CA. He is more professional now than me in theory of course with his formal economic and finance training. He thought Euro may appreciate a bit in the next few weeks but will start to decline again after end of Jul. I thought Euro will continue to appreciate longer over the next few months before plunging again. We will see who is right.

What is the next?

The market has erased almost all its gains of this year in the past few days. You know I'm not surprised at all with this kind of market actions, although I thought it would have happened much earlier. As I said many times, when general investors are frightened, panic and depressed, I start to see opportunities and I think good times to invest may be coming soon. While there is a good chance that the oversold markets may bounce back for a few days or even weeks, I don't feel this is the exact bottom of this round of correction. Likely there should be another more forceful plunge to scare away more people and make them really throw in the towels before a real bottom is reached. This is just how the market is working. So what do I see as the next intermediate trend towards the end of this year at least? There are a few things I'm watching and maybe act on soon:

- The gold mining stocks have likely reached their bottom and are significantly bouncing back in the mist of the severe market correction. This is a great sign and likely this trend will continue. I have bought quite a few gold stocks in the past few months and will continue to slowly add more if they come down a bit again. This is likely a very long term trend, although flunctions during its course are inevitable.
- You know how I feel about Euro, which to me will not exist within 5 years in its current form. But the equally garbage currency, US$, has appreciated too fast in the past few weeks, when people are totally panic about the EU situation. When everyone joins the boat on the same side, it will be capsized at some point. I think very soon this will happen. Let me make a bold prediction here that I think US$ will start to drop against Euro and other major currencies pretty soon, maybe in 2-3 weeks if not sooner. I probably will start to bet for a short-term Euro increase if I see this happens.
- If US$ indeed starts to drop, this will be good for precious metals and their stocks as well as the general stock market,  but bad for the US government bonds. I think when the true depressed sentiment is felt in the stock market sometime this summer, it will be a great time to buy stocks of your interest, which will last at least towards the end of the year. So get your money ready.
- I also predicted that oil price would drop significantly earlier this year when it was constantly above $100. It is happening now but I have a gut feeling this will continue till it drops below $70 or so. If this happens, it would be a great time to buy some high quality oil companies for long-term investment, such as XOM and COP etc.
- Copper has experienced a severe correction in the past few months but in the past few days, it has shown some relatively strength in its price action, i.e. dropping less than others. If US$ really starts its downturn, I think it will be good for copper and the copper companies. I'm especially interested in FCX, the biggest copper company.

I know there are a lot of ideas here. Since I may not be able to write as often as I'd like in the next few months, thought to put them out there for your reference. If any of them truly turns out to be correct, then you may act to take some opportunities.