Stocks Pullback to Start an Impactful Week of News

Stocks see persistent selling before stabilizing mid-day

The S&P 500 closed down 9 points (0.8%). E-mini traders in Chicago must have been depressed after the Bears were beaten down to their third string quarterback in an overall awful showing for their offensive line. Or perhaps the market was due for some selling as we begin a big week with earnings season beginning and the monthly jobs report on Friday morning. Shorts are positioning against the 1,150 level and longs think 1,120 will hold. The selling was controlled and continuous throughout the morning before finding some buyers at 1,130.

Q3 earnings season kicks off on Thursday

Alcoa (AA) gets the ball rolling for Q3 earnings season on Thursday after the close. The numbers are not going to be great, that much we know. The Q3 data will be based on revenues and earnings from July through September, a rough patch for the US economy following the late-April break in equity markets as we fell with the European debt crisis and heightened worries of a double dip recession. Many companies across the spectrum witnessed their slowest few months of business throughout this summer since early 2009, the beginning of the initial rebound in the global economy.

Ultimately though, the only important outcome will be investors' reaction. Can we ignore these reports? The Q2 earnings season response was marked by the negative macro economic environment overwhelming the generally positive micro results from individual firms. Can the spin on Q3 become the flip scenario? Perhaps the positive macro outlook (ie. avoiding the double dip) can outweigh the review-mirror look at the micro from Q3. This is all just a hunch but I think after some initial selling to give the market a healthy pullback after September's strong rally, market sentiment could quickly shift as investors look forward believing the correction from April's high discounted too much pain and the outlook is, in fact, quite bright for 2011. Take these thoughts with a grain of salt.

Oils get whacked despite crude's recent surge

My trades in the oil sector didn't cooperate today vastly underperforming the market. I hit out of Tidewater (TDW) with the continued weakness in the name. This idea is just not working out like I thought it would and I'm not going to be stubborn with it. I am much more comfortable in technology stocks but I'm trying to discover opportunity in other sectors as the leaders take a rest. Crude oil itself closed flat fully holding onto last week's gains. Perhaps I should have simply bought crude rather than messing around in companies. I'm taking a closer look at Murphy Oil (MUR) and Hess (HES) as names more directly levered to the price of oil if the sector can find a bid this month as I've been expecting.


Brandon R. Rowley
"Chance favors the prepared mind."

*DISCLOSURE: Long CXO, WFT.

Large Draw in Inventories Has Crude Oil in Focus

The large, greater-than-expected draws shown in today's crude inventory data is spurring a powerful rally in the energy sector. The Department of Energy reported a draw of 475,000 barrels v. -250k expectation in crude oil. Gasoline and distillates were even more surprising with expectations for build ups in inventory yet data showed -3.5 million and -1.3 million barrel draws, respectively. Crude oil and gasoline are up over 2% and heating oil has gained almost 3% today.

I picked up a few names this morning to profit from the possible move higher in crude and the expected rotation into the energy space. In particular, I like Schlumberger Limited (SLB), Tidewater Inc. (TDW) and Concho Resources Inc. (CXO).

Quick fundamental and technical stories:

Schlumberger (SLB) is the most expensive name of my three companies trading 16 times forward. But, SLB is perhaps the best stock to own in the oil space as a dominant player in exploration and production of petroleum products with the most advanced technologies. The company derives over 4/5^ths of its revenues from international business giving it significant exposure to growing economies even if the developed world is in the "new normal". SLB does not have a clear cut technical pattern besides the double bottom at $54 which should be a nice springboard for higher prices.

Tidewater Inc. (TDW), a provider of offshore vessels and marine support services, is trading at the low end of historical valuation at 9 times trailing earnings. While the stock is currently trading at $44.50, TDW boasts a book value of $48.15 per share. With low debt and a 23% profit margin and 92% of revenue from international operations, TDW has the opportunity to recover nicely with heightened demand for crude oil. Technically, share have been basing for months and may be ready to run having cleared the $44 level.

Concho Resources (CXO) is an exploration and development company of oil and natural gas fields in the Southwest United States. While shares are trading 26 times trailing earnings, the company is expected to grow 50% per year over the next five years giving it a PEG of just 0.5. Shares at at 52-week highs, a rarity in the oil space, and are clearing the $65 level which may bring in technical buyers.


Brandon R. Rowley
"Chance favors the prepared mind."

*DISCLOSURE: Long SLB, TDW, CXO.