Oil On Charted Waters
The slightest acquaintance with analyzing price behaviors of stocks invariably brings the inquirer into a world of charts, cyclical analyses and other predicting tools. They come in an amazing variety-from simple records of price movements over time periods ranging from a few minutes to centuries, line charts, Point and Figure charts, Japanese “candlesticks,” moving averages, Elliott Wave theories, the McClellan oscillator and many others.
Many of these seem to me to have been generated either to peddle charts and related “systems” or to encourage short-term trading. I was thus delighted to find a recent article by a Barron’s columnist, Michael Kahn, “The Only Chart Investors Need to Closely Follow.” The author points out that popular indicators have provided confused directions since the 2008 financial crisis. The only one that has consistently performed is following the major trend, which continues to the upside.
One familiar saying, “Sell in May and go away” stems from the seasonal cycle. This allegedly follows the market’s tendency to be weak in the summer and strong in the winter. The seasonal cycle hasn’t added much to market returns since 2008 as both corrections and flat periods were few and scattered.
Another forecast comes from the Presidential cycle based on the first two years of Presidential terms tending to be flat while the third and fourth years have posted strong gains. The stock market has more than doubled during the Obama Administration but the years within have defied the historic cycle. The weakest recent performance was totally flat in 2011 (the cycle’s third year) while 2012 and 2013 saw strong gains in the first and second years of his second term.
These and other famous market cycles do not seem to reliably yield the expected returns. Investors should always step back and observe which way the market is going, preferably using as long a time frame as they can. As Bob Dylan sang, “You don’t need a weatherman /to know which way the wind is blowing.”
Stocks have maintained their upward trend despite sporadic dips of 5% to 8%. Crude oil prices began a downtrend last year, losing over 50% since then. This trend may persist pending changes in some of the underlying factors such as new interruptions in supply from incidents in the Middle East or increasing demand from improving economies in Europe or Asia.
Interest rates provide another major trend, which is stable. Despite last year’s prevailing pundit predictions, interest rates did not go up and, the thirty-year Treasury bond has just set a new record all-time low of 2.4%. Stock market dips were partially attributable to worries that the Fed would raise interest rates. They didn’t and the deflationary impact of lower oil prices will doubtlessly delay the inevitable rate hikes.
Meanwhile, lower energy prices adversely affect marginal oil producers and businesses that support them. That impact is more immediate than the greater overall benefits flowing to energy users like manufacturers, utilities and to consumers. Retail sales strengthened only modestly in December as lower pump prices were just beginning.
These trends will boost Nike (NKE-$93), Federal Express (FDX-$173), Costco (COST-$139), and Simon Property Group (SPG-$199). Oil producing areas will suffer but importers like India will benefit. Mumbai-based Tata Motors (TTM-$45) will get additional mileage from increasing sales to consumers.
Low interest rates make companies with better dividend records even more attractive. The medical sector continues to reward us and I am adding Baxter Int’l (BAX-$71). This well known company has about $7 billion in bioscience sales and $9 billion in medical products. Earnings are growing steadily at about a 6% rate and its current 2.9% yield will be enhanced as it builds on its record of six straight years of increases.
The well-publicized crash in oil prices prompted stock market fluctuations that many confuse with market risk. Volatility may be unsettling but it provides opportunities for those who use long-range trends for perspective.
Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1995. [email protected] 949.494.1376/800.697.2622
