Here’s How Cruising Crude Can Top the Market Chop

Here’s How Cruising Crude Can Top the Market Chop
Greg Guenthner coming to you from Baltimore, MD...
After chopping around all morning, Turnaround Tuesday took hold and the major averages firmed up following a painful start to the trading week. The Dow eked out a small gain, while the Nasdaq Composite rose nearly 0.4%.

Most of the market’s clobbered momentum darlings clawed back a portion of their Monday losses. Fearless FANG-leader Netflix Inc. (NASDAQ:NFLX) led the charge, gaining almost 4% by the closing bell despite experiencing some late-day weakness.

But don’t let your guard down just yet. Futures are pointing to a lower open this morning as Asian and European stocks slide. We could see some additional downside action before the market is ready to resume its upward trajectory.

The first half of 2018 has certainly felt like a wild ride. But after an insane January rally followed by a gut-wrenching correction, stocks remain on track to post a relatively average year.

As the S&P 500 closes out the first half of the year with an annualized return of approximately 9%, CNBC notes that we’re sitting right at the long-term annual average return for stocks.

“The market is behaving in a fairly typical manner in other ways, too,” CNBC’s Michael Santoli notes. “Very strong corporate-earnings growth near 20 percent has not nearly been fully reflected in share prices, which of course means the market’s price-to-earnings ratio has dropped. This ‘valuation compression’ tends to be the rule as the Federal Reserve is on a rate-raising campaign later as the economic cycle matures.”

In other words, the action we’ve witnessed so far this year is downright normal for a mature bull market.

While we wait for the averages to find their footing today, more political drama is roiling the oil market.

News broke late Tuesday that the U.S. is ready to sanction any country that doesn’t completely cut its oil imports from Iran.

“The U.S. expects all countries to cut oil imports from Iran to ‘zero’ by Nov. 4 or risk sanctions,” The Wall Street Journal reports, “expressing a toughening of the Trump administration’s Iran policy as Washington tries to politically and economically isolate Tehran.”

The surprise announcement helped juice crude prices by nearly 4%. That puts light crude back above $70 for the first time this month and just about $2 from its 2018 highs.



Combine the Iran info with Friday’s OPEC headlines and you have the ingredients you need for another push higher in energy shares. On Monday, I showed you how the Energy Select Sector SPDR (NYSE:XLE) has remained in a consolidation pattern since rising off its April lows and topping out at new highs just seven weeks later. After threatening to break down below its May lows, XLE is now back above its 50-day moving average and hinting at a potential breakout.

That gives us a great opportunity to take advantage of a low-risk entry point in a promising energy play.

Check out the VanEck Vectors Oil Services ETF (NYSE:OIH). OIH has been a difficult play to nail down so far this year. We jumped onboard for a longer-term trade in early January only to get caught up in the February correction. It then fought back to its highs in May — only to sink back to support last week.

Now, we’re seeing OIH begin to bounce at support, which happens to be right at its 200-day moving average. If it can regain some of its lost momentum here as crude rebounds, it has another shot at topping $30 in the weeks ahead.

Sincerely,

Greg Guenthner

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