Has coal bottomed by now?

Anyone is interested in coal? Likely not! I bet no one wants to even talk about it. But believe or not, coal will not disappear in our life time and it is still one of the major energy sources around the world. Even in the US when the use of coal has consistently decreased over years due to cheap natural gas produced, half of our electricity generation is still relying on coal. Don't even mention in other countries where natural gas is several times more expensive. In short, coal will still be demanded in the foreseeable future. In the past several years, however, the coal supply has relentlessly decreased due to bankruptcy of many coal mining companies and shutdown of increasing numbers of coal mining projects because of depressed demands. At some point, demands will outpace supplies and when this happens, it may create a shortage of coal supplies since it usually takes years to restore a dead coal mine to its full production capacity. The million dollar question is whether the coal sector has bottomed? The recent move of BTU may make people think so.

If anyone is watching Peabody (BTU), the world largest coal mining company, you can certainly understand that brutality may still not be a strong enough word for BTU, as in the past 4 years it has experienced an epic crash from its peak of over $70 to below $2 recently. The trend is absolutely downwards. But in the past week or so, BTU is popping up and breaking out this 4 years downtrend. It jumped from $1.5 to $2.5, a huge move (+65%) not seen for years. Importantly, this move has made it go beyond the downward trend line, a bullish break-out. Does this mean a bull trend is starting now?  I'm not so sure yet. This huge move seems to be related to the rumors that BTU is hiring a bank for restructuring its debt in order to avoid bankruptcy. Due to heave short interest that most people were shorting BTU, this news may likely trigger a short squeeze to propel the moonshot for BTU.

Watch BTU closely to see if it can hold up its support line around $1.9. If it can and start to move up again without further unexpected positive news, then a trend change may indeed be considered for the coal sector. Buying at that time will be much safer if you want to catch up the early train. After all, it is still too early to say the bottom for coal is in until we see a clear sign.

You will regret if you don't buy some Chevron now

About 3-4 months ago, I made 2 bold predictions: the stock market was heading for a severe correction in the magnitude of 10-15% and the 10 year treasury rate could come down to 2%. Well, it took some time to materialize but both did occur as expected. But to be honest, the speedy crash within 2 days time was somewhat unexpected as I thought it would take quite some time with back and forth volatile fluctuations to finish the whole correction. But the market has its own mind and it wanted to complete it fast and decisively. So will the market simply recover from here and shoot up immediately? It is possible but I think the significant technical damage has been done and it will more likely take time to repair. In other words, the violent rebound in the past 2 sessions could be short lived and we may see S&P go down again toward low 1900s soon.  If it can hold above 1900, it is bullish and could mean it wants to move higher soon.

With this kind of panic selling, many great stocks lost quite a bit of their values, but I think CVX is especially at a great value. People are worried about its ability to pay dividends but it has a 27 years of track record of paying increasing dividends. You can bet during this 27 years period it has experienced many challenging times like today, including the financial crisis in 2008-2009 but nothing has materially damaged its business in a sustainable fashion. It will survive and come back again. Its CFO recently has specifically addressed the concern of its dividends and clearly indicated that they are doing anything they can to keep the track record intact. Another good sign is that many insiders are buying at the prices of $100, $90s, to $80s. Historically, CVX dividend yields have ranged between 2.5% to 4.5%. You rarely found the time when its yield jumped to 5-6%, suggesting its share price was quite depressed. Now is the time that CVX dividend yield is around 6%. I don't think it will stay there for long. Yes, the crude oil may still go down further and CVX could still fluctuate in price. But to me, it will be insane to not buy some CVX shares at this low price for long-term investment, especially if you keep dividends reinvested. For long-term investment with great stocks undervalued, its price fluctuations really do not mean too much. Buy some CVX now!

Now what: Baidu

As predicted, Baidu did follow my instruction and came down to the $150 level. At this level, Baidu is not particularly expensive but certainly is not cheap as well. So what will Baidu do moving forward?

While Baidu did continue its downtrend as I expected, I didn't expect it would have completed this correction so fast. Apparently the fast downward move was largely associated with the gigantic plummet of the Chinese market as well as the recent panic sell-off in the US market. Unless this kind of brutal sell-off continues relentless without a stop, I don't expect Baidu will easily give up its next strong support at $150. It will likely stand up on it but the million dollar question is if you can safely buy now. It depends on whether you want to trade or invest for long term. If you can act nimbly for trading, now is likely a good time to buy, aiming for a bouncing back. But be aware that its overhead resistance of $175 is not an easy target to break out. More likely it will be moving sideways for a while between 150-175 until some good news comes in to elevate it. Even after it successfully breaks out through 175, it is still within a much bigger downward channel. If it truly starts to show new life and begins a uptrend, it has to first break out decisively through the upper trend line of the descending channel. Only then, it will be safe to buy for long-term.

In a nutshell, Baidu may be a good buy for trading but it's too early to decide whether it is a safe buy for long-term. If you really like it and want to own some, buy a small portion first and watch for its high highs and high lows to establish an uptrend.

Where will the market go from here

In a nutshell, in the next 1-2 weeks, S&P will likely go up to meet its 50 day MA (red line) around 2100 but then it will resume its downtrend again and test various support lines. The most likely scenario for me is that S&P will be bottoming around 1990-1950. But if the situation becomes really ugly, then it is also possible S&P may go down towards the bottom of the last Oct correction below 1900. We may likely not see this but we need to keep this in mind as well.

This is what I predicted early July when I got quite a few responses saying I was too pessimistic as all the data looked quite positive at that time. You may wanted to check the pathway I paved for S&P then. It almost exactly followed my script (the yellow line below). Now with the brutal crashes in the past couple of days, there was enough panic in the market and we do smell capitulation. This is not what you will see at the top but more so at the bottom, even in a short-term. Actually all the technical indicators show an extremely oversold condition, which often precede a rebound. With this kind of panic runaway, I'd think a rebound could be quite strong and fierce that may start Monday. I think virtually you can buy any stocks and you may likely make some quick money. Of course I'm not suggesting to blindly buy. So where the market may go in the next few weeks? S&P has broken two major support lines, one around 2050 and the other 2000 (green lines). Naturally when the elastic band snaps back after stretched too much, it won't be a slight move. It will first try to break out 2000 but more likely it will try to kiss 2050 if the momentum is strong enough. However, keep in mind S&P has been technically damaged significantly and it will take time to repair. There is still a chance it will resume its downtrend to test the next support around 1860. But first we have to see if it can hold up at the current important support at 1970.

Baidu is on its way to $150

Here is what I said a couple of weeks ago in my playbook for Baidu: The recent missed earnings may further push it down to a lower level. It has broken out its support around 175. Given being a little bit oversold, it may bounce back to 175, a resistance now. I doubt it can break this out. If I'm right, look for more downsides for BIDU. Its next strong support will be around 150.

Amazingly BIDU has followed exactly the path that I have paved for it: it did bounce back to $175 and then turned around to plummet again to $164 as I'm writing. Unless some unexpected positive news pops up, BIDU is almost for sure will go down to test its next support around $150. Any attempt to rebound will likely fail before it finishes its downtrend.

You can love its services and functions but don't fall in love with its stock, at least for now.

The weakest link

If anyone asks you what is the worst sector at the moment, I'm pretty sure most people would think about oil industry. Indeed crude oil has got haircut over 50% in the past year and it dose not look like the pain is over. The blood will continue to flow in the streets for a while. In this kind of situation, it is fairly hard to trade. Yes, from time to time you can pinpoint to certain oversold condition for a quick trade for rebound but this requires really good technical skills and courage. But traders can also think about short to make money. What to short? Well, obviously you want to short those weakest link that has a high likelihood to fall. What companies are qualified for that? Think about it, if a company is under a high burden of debt with insufficient cash flow and they cannot even make money when oil is over $90, what will be their destine when oil is at low $40 and may go down further? Bankruptcy will be their fate! Oil will only bottom when you see more and more oil companies go belly up. See what happens to PVA (Penn Virginia), a once rather promising oil exploration and service company paying good dividends. Unfortunately during the booming time, PVA expanded too much with too much debt in the book and now it is on the verge of bankruptcy.

 

I know another 2 companies that are in the same situation and there is a good chance they will go down to zero. One is Cobalt Energy (CIE) and the other is Erin Energy (ERN). Unless oil suddenly jumps to over $100, these two companies may likely not be able to survive long, given high debt ratio with no free cash flow. Adding them as short positions may provide some hedge for your portfolio.  

Don't ignore this bullish signal

People may want to vomit if you start to mention oil or gold. Hardly anyone is interested in them, letting along putting money into them. This is kind of sentiment you usually see at the bottom, not at the top. But let me be clear, I don't think the ultimate bottom for both has necessarily been touched. More pain may still continue for a while, but we are damn close to the pivotal point, if not yet there!
But today's price action for both gold and oil mining companies is really bullish at least for short term. See the two charts below. For gold miners (GDX), it opened very low but closed high while gold was not doing that great. For oil stocks (XLE), it was more impressive: opened very low but recovered from all the loss and closed high, in the context of crashing oil prices. This usually suggests a short-term bottom is in and the sectors want to go up from here. I bet 10-20% increase is possible. Of course, no guarantee and it is still risky for them as any black swan type of news could easily turn them upside down. Trade accordingly and be ready to lose.

More downside is likely for Baidu

Baidu (BIDU) is the Google in China and has a monoply position given Google has been driven out from the market. It is certainly a great business but even a good business may also face some hicups. Technically BIDU is presenting a rather dire prospect at least for near future. As you can see below, since late last year when BIDU peaked at $250, it has entered a very well defined downtrend. The recent missed earnings may further push it down to a lower level. It has broken out its support around 175. Given being a little bit oversold, it may bounce back to 175, a resistance now. I doubt it can break this out. If I'm right, look for more downsides for BIDU. Its next strong support will be around 150.

This Wall Street darling may likely falter badly

As I have warned for couple of months, the overall market has presented plenty of warning signals that suggest there is a high likelihood that more pain for stocks will be coming. Of course, with 6 years relentless uptrend without any significant corrections, people are used to seeing stocks keeping going up. So even if a severe correction is underway, it won’t be a straight downturn. There are sufficient people out there who just want to buy at any weakness. But when the market finally cracks, those weak hands will be the first ones to run and shaken out. If you do want to buy, always think about what’s your exist strategy and better, to add some protection. One way of doing so is to short those stocks with ridiculously high valuation that cannot be supported by the fundamentals. Quite often, you can find such candidates from recent IPOs. These days, IPOs are generally greatly loved and their IPO prices are often bided up to the moon.  But eventually the reality will settle in and as soon as people find out that their stock prices at the perfection level cannot be supported by their business, they will dump them and hard! We have seen what happened to TWTR, which has been cut half since IPO and also SHAK, another 50% haircut. I find another good candidate to consider.

The company I’m talking about is Zoe’s Kitchen (ZOES). This is a pizza fast food company, which is called the Chipotle of its industry. It can prepare delicious pizza within minutes. Apparently it is very much loved by its customers and it deserves to have a rich valuation for its stock price. But can it in any way to justify a PE of 1200? In other words, investors have to wait for 1200 years to get back their money from its earnings. I bet no one can wait for that long!!! But regardless what I’m thinking, there are abundant people who simply love this stock and want to buy anyway. It has recently shot up to all time high around $45. However, this recent move did show some technical weakness. It is certainly overbought by any means and the upward moment has no momentum to support. It dropped to 40 recently but it is attempting to bounce back.  If it goes further up to $45, it becomes a bearish double top formation. I bet, if the overall market starts to falter, this kind of hype-stock will follow closely and likely more to the downside. I think it’s worthwhile to short ZOES around $45 as part of hedge to protect your portfolio.