Starting the week we were looking for retail sales to set the tone for the markets, instead we are facing $100 a barrel crude prices and geopolitical issues in the Mideast. The U.S. markets are in a state of flux and the outcome looking forward is uncertain. As we have discussed many time, the market doesn’t like uncertainty and generally trades lower as a result. As an investor my first response is protection of principle and second, find the opportunities in the uncertainty. The question is where and what opportunities are coming out of these current events?
The first course of action is to follow the leaders. Retail earnings are being reported this week and they are generally lost as a result of the headline news. Home Depot (NYSE:HD) Chico’s FAS, Saks (NYSE:SKS) and Macy’s (NYSE:M) reported stronger results with solid forward guidance. TJ Maxx (NYSE:TJX), Target (NYSE:TGT), Walmart (NYSE:WMT) and Lowes (NYSE:LOW) were in line, but disappointing on revenue or guidance. Watch the winners as the headline news dissipates and markets return to a ”normal” trading environment. The leaders will rebound and the losers will lag. Find the good in the bad, and keep a watch list of opportunities.
Second, watch for climax runs in response to the news. Crude oil ran above the $100 mark yesterday. On Friday it was trading at just north of $84? Looking at a chart of oil you see the spike higher which begs the question, what happens if and when Libya settles the current situation? Has demand changed? Did supply change? The answer to those questions will give you a simple path to opportunity.
With Egypt oil pushed to a high of $92 and fell back to $84 when it was settled. The previous trading range was $80-90 for crude and that is where it could return, depending on the outcome in the Mideast. Thus, on my watch list would be an opportunity to play the downside of oil should the current events be resolved. On the other side if the events escalate oil would move higher and the opportunity would be to add to your oil position on the spike higher.
Third, what other opportunities are a result of the events current in the news? If oil continues to spike higher the alternative energy stocks would be a likely benefactor. For example, solar energy could push higher. TAN, Guggenheim Solar ETF moved off the lows near $7 when the Egypt issue erupted and moved above $9. It has retraced with the broad markets to test support near the $8.25 mark. There is plenty of upside in the alternative energy stocks should the issues in Libya grow along with the price of oil.
There are plenty of opportunities created by the event itself and equally, there are opportunities once the event is resolved. As an investor my goal is to find a method or strategy for capturing the resulting opportunities these events present both now and in the future. We are in the process of cultivating the opportunities to post on the watch list to track as we move forward. Review the Watch List to find the most recent posts and the Play List for those we have added to our portfolios.
The result of the current events has been a pullback or test for the broad markets. That has resulted in stops being triggered and cash being raised. This is a natural process of investing. We now have cash available to take advantage of the opportunities discussed above as a result of the events. The trend off the August low has lulled some investors into believing that the trend will not break or the upside is firmly in control. Anything is possible, but one thing is certain, managing the risk of you money is a priority.