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Finding Opportunities in a Cooling Market

Investors have enjoyed quite the bull run since the stock market bounced off its low from last year, or even from 2009 when the recession bottomed. Many investors, however, have been anticipating

Investors have enjoyed quite the bull run since the stock market bounced off its low from last year, or even from 2009 when the recession bottomed. Many investors, however, have been anticipating at least a minor pullback for when the market finally finds a reason to take profits.

April proved to be quite a choppy month for traders and investors as bulls and bears seesawed back and forth between solid earnings numbers versus weaker economic and international trends.

This week, asked Toni Turner of TrendStar Trading Group for her thoughts on the current market climate, and what areas she may be watching to gauge its direction.

EQ: The start of May has traditionally marked the end of the best six months period in the market. Do you see any indication that the recent bull run may be cooling off?

Turner: Yes, I do see indications. We have had a fantastic run since October, and we’ve actually had a fantastic three years since the March 2009 lows. These cycles usually last three to five years, and while this one is probably not over, it’s getting rather long of tooth. The good news is election years typically see bull markets. But I think, like any long distance runner, the stock market has to stop and take a breath every now and then, and it appears to be doing so right now. As we move through earnings season, and more news surfacing from Europe, we will find out if the S&P 500 can go back over its March high of 1420, and then resume the uptrend. If it can’t, then maybe we have to chop sideways for a while or take more of a breather this summer.

EQ: We’ve discussed your sector strategy and using ETFs during bullish or bearish market environments. The one example we used was the Utilities sector. Which sectors are you watching right now to gauge the market’s sentiment?

Turner: Strangely enough, I’m back to Utilities. It’s been moving sideways basically since its little pop up at the end of December. You can always tell when investors get worried because they’ll run to Utilities. The Utilities Select Sector SPDR (XLU) ETF, tends to chop sideways much of the time. You can always tell when investors get worried because the interest in the sector increases and the XLU starts rising. Right now, we see perfect evidence of that as the first part of April saw Utilities fall down to their 200-day moving average. The XLU has begun to rise  over the last couple of weeks. It’s really got some momentum going, which tells me  that many investors are saying they’ll sit out of high-beta stocks for the time being and move into something that’s more conservative and will pay a dividend.

EQ: So in that scenario where investors are adopting a more conservative strategy, is there anything wrong with just sitting on cash?

Turner: There’s nothing ever wrong with sitting on cash, because cash is a position. That’s my way of thinking because over the years, I’ve seen so many things happen in this stock market where cash was the best place to wait out tumultuous times. Traders are now noting that the Volatility Index (VIX) is headed back down to its prior lows and, of course, that could mean that when the VIX gets stretched too far to the downside, it may start to rise and more volatility will enter the markets. So I see nothing wrong with adopting a wait-and-see attitude, especially over the next couple of weeks and even longer if necessary.

EQ: One group that has been absolutely pummeled over the last few years but could be bouncing off a bottom is natural gas. Is this a group that you’re watching? If so, what are the characteristics or trends that you want to see here?

Turner: Natural gas has gotten absolutely pummeled. I follow the E-mini natural gas futures, and it’s really interesting to watch how they have come down, but it’s actually just bumped up  during the last week. As you all know, natural gas is the second largest physical commodity future contract in the world by volume. We’ve experienced  increased production in the past few years. Demand has obviously not kept up with supply and storage space is challenged. However, it has popped up in the last week so I’m keeping an eye on it. There are some natural gas companies that are getting nice pops and  it’s valid to keep an eye on them.

While having such low prices on natural gas has been great for the economy, because it’s helped to keep costs low for of industrial manufacturing and production, nothing goes up or down forever. So it looks like, at least at the moment, some buying activity is coming into natural gas. As I mentioned, one of the best ways to take advantage of it is to look at the natural gas companies like Apache (APA), Devon Energy (DVN), EOG Resources (EOG), El Paso (EP), Noble Energy (NBL), Ni Source (NI), and Southwestern Energy (SWN). These companies have all been beaten down in concert with this falling natural gas prices. They’ve offered some opportunities recently if you’re fast, but you’ve got to be fast and you’ve got to be nimble and willing to exit if prices roll over.

The astronomer Carl Sagan said, “It was easy to predict mass car ownership but hard to predict Walmart.”