Weekly Newsletter

Sterling Weekly for February 27th, 2012 – A Look at the Price of Oil

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Since the previous edition of the Sterling Weekly the Dow Jones Industrial Average rose 181.72 points or approximately 1.4%% to 12,982.95 The overall market has continued to move higher and the talk in the financial press has focused on the Dow Jones Industrial Average approaching the 13,000 level. While this is a very big psychological level, I do not see if having any value from a technical or chart basis. While everyone has focused on the Dow Jones Industrial Average, the price of Oil has risen almost 10% in the month of February. This is not a good thing like the rising level of the Dow Jones Industrial Average is.

Crude oil closed at $109.77 on Friday, and I thought it was time to take a close look at the price of oil and see where it may be headed. I’ve inserted a chart of the price of oil below showing its peak in 2008 and subsequent decline.

Oil in 2008

The price of oil reached a closing high of $145.66 on July 11th, 2008 and following the start of the 2008 financial crisis declined to a closing low of $30.81 on December 22nd, 2008. I’ve inserted a chart of the price of oil over the last 12 months below.

Oil in 2011

The price of oil reached a short term high of $113.92 per barrel on April 29th, 2011, and then declined to $76.78 on October 4th, 2011. What is very important about this chart is that if the price of oil closed above $113.92 per barrel, then it will have completed a “cup pattern” with a measured move to $151.06 per barrel. I consider cup patterns to be very highly reliable, and very predictable. On Friday the price of wholesale gasoline closed at $3.15 per gallon. This is a ratio of just under 35 to 1 between the price of oil and gasoline. Applying that ratio to $150 per barrel oil and you get an estimated wholesale gasoline of approximately $4.28 per gallon. That would most likely put the price at the pump close to $5.00 per gallon. That is going to cause some very real pain for consumers and the US economy.

If that doesn’t scare you enough, if the price of oil closes above $145.66 per barrel, then it will have completed a much larger cup pattern that dates back to the summer of 2008 with a measured move to $260.51 per barrel. OUCH!!!! If $150 per barrel oil is a problem for the US economy, then this is going to be an outright disaster. If the current ratio between the price of oil and gasoline remains in place, then we are looking at the wholesale price of gasoline reaching approximately $7.50 per gallon! This would probably put the price at the pump well above $8.00 per gallon. I think at that price level, big portions of the US and world economies would shut down.

Do I think this could happen? Unfortunately yes! I have found cup patterns to be among the most tradable of chart patterns. If oil closes above $113.92 per barrel, then I think we could see a move to $150 per barrel in 6 months or less. Not only is that going to cause real pain for consumers, but it will put a real damper on the US economy, as well as the world economy. There is a very real danger that the price of oil at that level will ignite inflation in this country and on a world wide basis. If inflation really takes off, just imagine what that will do to the efforts to resolve the European debt crisis! How long would it take for the price of oil to reach $260 per barrel? My best guess is that it would take anywhere from 3-5 years. However, a nuke going off in the Mid-East could send it there over night. Either way, it would be a real disaster for everyone. If we see anything close to $150 per barrel or higher, then one more thing I am relatively certain of is that we will not see the Dow Jones Industrial Average anywhere close to new highs.

In case you are wondering about our track record of commenting on the price of Oil; our past comments can be found on our Amex Oil & Gas Index ‘XOI’ page. We don’t comment often, but when we have commented, we haven’t been wrong yet.

This week does see some important economic releases this week with GDP numbers on Wednesday, and Consumer Confidence on Tuesday. The GDP number, as always, has the potential to move the market in a significant way.

Sterling Calendars for the Week of February 27th, 2012
Economic Calendar
Date Est.
Time		 Release For Consensus Prior
02/27 10:00am Existing Home Sales Jan. 1.0% (1.9%)
02/28 8:30am Durable Goods Orders Jan. (1.4%) 3.0%
02/28 8:30am Durable Goods – Ex Transportation Jan. 0.2% 2.2%
02/28 9:00am Cas-Shiller 20 City Index Dec. (3.6%) (3.7%)
02/28 10:00am Consumer Confidence Index Feb. 62.5 61.1
02/29 7:00am MBA Mortgage Index 02/25 N/A (4.5%)
02/29 8:30am GDP – Second Estimate Q4 2.8% 2.8%
02/29 8:30am GDP Deflator – Second. Est. Q4 0.4% 0.4%
02/29 9:45am Chicago PMI Feb. 60.0 60.2
02/29 10:30am Crude Inventories 02/25 N/A 1.633M
02/29 2:00pm Fed’s Beige Book Feb.
03/01 8:30am Initial Claims 02/25 355K 351K
03/01 8:30am Continuing Claims 02/18 3,425K 3,392K
03/01 8:30am Personal Income Jan. 0.4% 0.5%
03/01 8:30am Personal Spending Jan. 0.3% 0.0%
03/01 8:30am PCE Prices – Core Jan. 0.2% 0.2%
03/01 10:00am ISM Index Feb. 54.5 54.1
03/01 10:00am Construction Spending Jan. 1.0% 1.5%
03/01 2:00pm Auto Sales Feb. N/A 5.0M
03/01 2:00pm Truck Sales Feb. N/A 5.73M

Market Commentary

Sterling Market Commentary for Friday February 24th, 2012 – A Quick Look at Oil

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A Look at Thursday’s Market: The overall market moved moderately higher on Thursday in a relatively broad based move. In the commodities markets Oil was higher by $0.45 to $108.28  per barrel, and Gold was higher by $15.0 to $1,786.30 per ounce.  In the grain market,  Wheat was lower by $0.026 to $6.416 per bushel, and Corn was higher by $0.012 to $6.394 per bushel, while Soybeans were higher by $0.044 to $12.766 per bushel.

With the price of oil at $108 per barrel and the price of gasoline having been in the news for the last couple of weeks,  energy prices are starting to be paid attention to again. I’ve taken a quick look at the chats, and I see upside resistance on oil in the high $112 price level.  If the price of oil closes above this level, then there will have been a “cup pattern” completed on the charts with a measured move to roughly the high $149 level. If that happens, then another larger “cup pattern” will have been completed, with a measured move to almost $240 per barrel.  Ouch ! My best guess is that would put the price of gasoline to somewhere between $6 to $8 per gallon.

Despite what the naysayers may say,  if you take a look at the charts, the possibility of this happen rather quickly is real.  This weekend, I am going to take a very close look at the charts, and see what the exact numbers are. I will publish the results in this weekends edition of the Sterling Weekly.  I will also provide my results in Monday’s market commentary.

Also, it should be noted that despite the upward movement of the Dow Jones Industrial Average and the S&P 500,  the Dow Jones Transportation Index has been moving lower.  For those who believe in the Dow Theory this is a negative signal for the overall market.  My thoughts are that the Dow Transports are being pushed lower due to higher oil prices; additionally the Dow Jones Transportation Average is generally considered to be a fairly reliable indicator as transports companies ship goods and services, thus providing a good look at where the economy is going.  If this trend continues,  then the odds are that the broad market will follow the transports lower, not the other way around.

A Look ahead to Friday’s Market:  In looking at the charts from yesterday’s market a couple of items come to my attention.  The vast majority of the various sector indices I looked at have positive chart patterns.  However, when I look at the charts of the individual stocks with the highest trading volume, at best about half these stocks are moving higher, and those that are have light volume in comparison to their historical trading history.  The rest of the stocks look weak.

Granted, the market could continue higher for quite some time, but it sure makes me nervous.

The Bottom Line:  A trend remains in place until it is broken.  However the longer a trend is in place, the greater the chances of it being broken.

www.sterlinginvestments.com

Market Commentary

Sterling Market Commentary for Tuesday February 21st, 2012

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A Look at Friday’s Market:  The overall market moved moderately higher Friday in a relatively broad based move that saw the majority of the various sector indices I track move higher as well.  There was strength in the Banking, Chemicals, Consumer, Cyclicals, Healthcare, Financials, Retailers, and Commodity related indices.  There was weakness in the High Tech, Transports, and Gold/Silver Indices.  Oil was higher by $0.96 to $103.60 per barrel, and Gold was lower by $2.50 to $1,725.90 per ounce.  In the grain markets, Wheat was higher by $0.152 to $6.44 per bushel, and Corn was higher by $0.054 to $6.416 per bushel, while Soybeans were higher by $0.092 to $12.674 per bushel.

A Look Ahead to Tuesday’s Market:  In looking at the charts from Friday’s market, the vast majority of the stocks and various sector indices I looked at continue have upward chart patterns.  This is obviously a busllish sign for the market. However, a point of concern is that the Dow Jones Transportation Average now has a negative chart pattern and appears to be headed lower.  While the Dow Jones Transportation Average may reverse this trend and head back higher, my concerns are that the rising price of oil and other regulatory issues are going to put the earnings of the components under pressure and ultimately send the Dow Jones Transportation Average lower.  However, if you believe in the Dow Theory, as I do,  then if this downward trend in the Dow Transports continues, then this is a very ominous sign for the overall market.

At some point the general public is going to wake up and realize that the price of over is noticeably over $100 per barrel and it is hitting their pocket books;  when that happens it will impact consumer spending and the economy.

The Bottom Line:  A trend remains in place until it is broken, and the current trend is to the upside. However that doesn’t mean we can completely ignore the warning signs.

www.sterlinginvestments.com

Market Commentary

Sterling Market Commentary for Tuesday February 14th, 2012

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 A Look at Yesterday’s Market:  The overall market moved moderately higher in a broad based move that saw the vast majority of the sector indices I track move higher as well.  There was strength in the airlines, Biotechs, Transports, Retailers, Cyclicals, Insurance, Banking, Oil & Gas, Telecom and Commodities.  There was weakness in the Gold/Silver, and Utilities.  In the commodities markets, Oil was higher by $2.24 to $100.91 per barrel, and Gold was lower by $0.40 to $1,724.90 per ounce. In the grain markets, Wheat was higher by $0.112 to $6.412 per bushel, and Corn was higher by $0.076 to $6.394 per bushel, while Soybeans were higher by $0.23 to $12.520 per bushel.

A Few Thoughts on Tuesday’s Market:  In looking at the charts of the various indices I track, I noticed a couple of things.  The 1st being that several of the various sector indices appear to be looking as if they could easily turn lower.  Additionally the Gold/Silver indices continue to look weak.  The second thing that I noticed is that a couple of the high tech indices appear to have gone parabolic with their chart patterns. In effect, they sort of look similar to the chart of Apple, Inc. ‘AAPL’ over the course of the last several months.  The NASDAQ 100 has also been effected by this as well.  This is a result of the way in which these indices are designed.  They are capitalization weighted indices, which means that the ratio, or weighting, of the stocks within the index is based upon the market capitalization of the companies that comprise the index.  I have never been in favor of this form of index construction.  I think it has several drawbacks,  some of which can have very devastating consequences.

I think capitalization weighted indices can create the equivalent of self-fulfilling prophecies when one or a handful of stocks out perform the overall market.  For example as more money is invested in the shares of Apple, Inc. and the market capitalization rise,  then the weighting of Apple within these indices is increased.  As a result of the weighting increase, index funds then increase their holdings of Apple in order to compensate and attempt to match the performance of the index.  This can then increase a circular, self-reinforcement loop; which can also have the effect of accelerating any downside movement during a sell off.

Another less noticed side effect of market capitalization weighting of stock indices is that the other companies within the index see selling pressure on their shares as their weighting within the index is reduced.  While this is probably not an overly dramatic amount, it still is a factor. However, this could very easily be offset by massive amounts of money flowing into these sectors as investors chase the latest hot sector.  In that case it could help create a bubble in that particular sector.

Another of my complaints is that the market capitalization weighting of stock indices distorts the real performance of the stocks within the index.  While it is very obvious how the operations of Apple are currently performing, it is far from obvious how the business operations of the other component companies are performing. I think this distortion can very easily cause a misallocation of capital that is very bad for investors and the overall market.

My suggestion for a potential solution to this problem is to limit the possible weighting a company may have within a particular stock index.  For example one possible solution is within the NASDAQ 100 to limit any particular company to 2%.  For example,  the top 25 companies by market capitalization would receive a 2% weighting, the next 25 companies would receive a 1% weighting, and the bottom 50 companies would receive a 1/2% weighting.  I’ve been kicking around this idea for years.  It is just my idea, and it is something that would be purely voluntarily implemented by the people that run these indices.  But I think it would definitely help smooth out some of the wilder fluctuations and distortions in the some of these stock indices.

With respect to the overall market, I think it looks like we could be putting a short term top in place with the potential for a pullback in the near future.

The Bottom Line:  It is still a dull market, and never short a dull market.

www.sterlinginvestments.com

Market Commentary

Sterling Market Commentary for Monday Feburary 13th, 2012

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A Look at Friday’s Market:  The overall market moved moderately lower on Friday in a broad based move that saw all the various sector indices I track move lower on the day.  The weakest sectors were the High Tech, Commodities, Gold/Silver, Chemicals, Banking, Biotech, Broker/Dealers, and Cyclicals.  Oil was lower by $1.17 to $98.67 per barrel, and Gold was lower by $15.90 to $1,725.30 per ounce.  In the grain markets Wheat was lower by $0.16 to $6.30 per bushel, and Corn was lower by $0.052 to $6.316 per bushel, while Soybeans were higher by $0.014 to $12.29 per bushel.  The primary catalyst for the move lower was the issues in Greece concerning the acceptance of the austerity measures needed to deal with the Greek financial crisis.

A Few Thoughts on Monday’s Market: In looking at the charts from Friday’s market I noticed that a pretty high number of the various sector indices I track appear to be turning negative.  Also in looking at the stocks with the highest trading volume, the majority of those that are not moving sideways look weak with negative chart patterns.  History has taught me that this generally precedes a turn lower by the market.  My thoughts are that the recent move higher may be beginning to run out of steam.  With respect to the Greek Financial Crisis, I just do not see the Greek people easily accepting the mandated reforms. I do not think the Greek Financial Crisis is over yet.

The Bottom Line:  While I think the current market uptrend may continue a few days longer, I am concerned that it may be running out of steam.

www.sterlinginvestments.com

Market Commentary, Weekly Newsletter

Sterling Weekly for the Week of February 13th, 2012 – 2011 Index Performance Results

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Since the previous edition of the Sterling Weekly the Dow Jones Industrial Average rose 1,404.23 points or approximately 12.3% to 12,801.23 Over the course of the last 3 1/2 months since I last since I last wrote about the market it has staged a rather impressive rally. As a result, I was fairly surprised when I looked at the performance results of the various indices I track. Sterling Investment Services tracks roughly 39 various sector indices. Of these indices, 3 are interest rate indices that track the movement of interest rates, and the other 36 indices are stock based indices that either track the broad market or are designed to track specific market sectors.

The 3 interest rate indices I track obviously did well as the Fed manipulated interest lower, sending bond prices higher in the process. It is tough to get any message from a manipulated market. However, what I do see is a bubble forming that I am very concerned will be far more damaging to the US and world economy when it bursts than the housing bubble was when it burst. Of the 36 stock indices I track, 13 managed to show positive gains for 2011, however it should be noted that 2 of these indices, the S&P 100 ‘OEX’ and the M.S. Consumer Index ‘CMR’ both posted a gain of less than 1% and could have easily been negative on the year. Two (2) more indices, the Amex Oil & Gas Index ‘XOI’, and the Amex Natural Gas Index ‘XNG’ both had gains of less than 2%, which is pretty poor performance in my opinion. It is also interesting to note that many of 2011’s top performing stock indices. Also interestingly enough, almost all of the indices that posted positive returns for 2011 were among the poorest performers last year.

I always like to look at these year end results and see what I can find in the performance results of the various sector indices. I generally find it pretty interesting to see what the market it telling us. This year it is a tough message. I look at these results and I see a slowing broad economy. I know the market rallied late this year, but the broad market results indicate a combination of slowing profits growth and rising inflation or interest rates. I just do not see economic growth in the results of these sector indices. Maybe things will change as we get closer to the election, but I see a declining market between now and then.

Ticker  Closing Level 1 Year Change
Index Name Symbol 31-Dec-11 31-Dec-10 Points Percent
Dow Jones Utilities Index DJ-15 464.68 404.99 59.69 14.74%
Phlx. Utility Sector UTY 481.45 421.84 59.61 14.13%
S&P Healthcare Index HCX 401.90 364.78 37.12 10.18%
Amex Pharmaceuticals DRG 332.94 305.88 27.06 8.85%
MS. Healthcare Providers RXP 1,733.89 1,640.72 93.17 5.68%
Dow Jones Industrial Avg. DJ-30 12,217.56 11,577.51 640.05 5.53%
Natural Gas Index XNG 636.15 605.48 30.67 5.07%
S&P Retail Index RLX 523.20 508.38 14.82 2.92%
NASDAQ 100 Index NDX 2,277.83 2,217.86 59.97 2.70%
Computer Tech. Index XCI 973.96 956.49 17.47 1.83%
Amex Oil & Gas XOI 1,229.10 1,213.16 15.94 1.31%
S&P 100 Index OEX 570.79 565.90 4.89 0.86%
MS Consumer Index CMR 759.13 753.62 5.51 0.73%
S&P 500 Index SPX 1,257.60 1,257.64 (0.04) 0.00%
Russell 1000 Index RUI 693.36 696.90 (3.54) -0.51%
Dow Jones Transportation DJ-20 5,019.69 5,106.75 (87.06) -1.70%
CBOE Technology Index TXX 851.59 878.75 (27.16) -3.09%
S&P Chemicals Index CEX 298.73 309.32 (10.59) -3.42%
North Am. Telecom Index XTC 881.99 933.25 (51.26) -5.49%
Amex Interactive IIX 281.74 307.73 (25.99) -8.45%
S&P Insurance Index IUX 170.17 188.22 (18.05) -9.59%
MS. High Tech. Index MSH 588.88 664.20 (75.32) -11.34%
Phlx. Semiconductor Index SOX 364.44 411.82 (47.38) -11.51%
Phlx. Oil Services Sector OSX 216.28 245.12 (28.84) -11.77%
Amex MS Commodities CRX 844.94 958.79 (113.85) -11.87%
S&P Banking Index BIX 130.52 148.80 (18.28) -12.28%
Amex Gold Bugs HUI 498.73 573.32 (74.59) -13.01%
Amex Biotech Index BTK 1,091.42 1,297.63 (206.21) -15.89%
MS Cyclical Index CYC 874.14 1,042.71 (168.57) -16.17%
Amex Gold Miners GDM 1,428.98 1,705.45 (276.47) -16.21%
Phlx. Gold/Silver Index XAU 180.64 226.58 (45.94) -20.28%
Amex Networking NWX 215.15 280.56 (65.41) -23.31%
Amex Disk Drive DDX 101.79 134.84 (33.05) -24.51%
KBW Banking Index BKW 39.38 52.21 (12.83) -24.57%
Amex Airlines Index XAL 32.44 47.02 (14.58) -31.01%
Amex Sec. Broker/Dealer XBD 83.27 121.51 (38.24) -31.47%
CBOE 30 Yr. Treasury Yield TYX 28.29 43.62 (15.33) -35.14%
CBOE 10 Yr. Treasury Yield TNX 18.71 33.05 (14.34) -43.39%
CBOE 5 Yr. Treasury Yield FVX 8.30 20.16 (11.86) -58.83%
———- ———- ———-
Average (6.47%)

It should be noted that this week has a rather heavy economic calendar for news release;and late in the week the government releases inflation numbers at the wholesale and consumer level. The inflation numbers should have some attention paid to them. We are currently seeing the year over year change in consumer price index at around 2%, which is slightly above the current yield on the 10-year Treasury bond, and about 1% below the current yield on a 30-year T-bond. For a long time I have expressed my concern that the Fed is creating a bubble in the bond market that could be extremely damaging when it bursts. My concerns are that if we see a continued increase in the year over year Consumer Price Index, which in effect pushes the yields on these bonds into negative territory, then the greater the damage will be when the bond bubble finally bursts.

Sterling
Calendars for the Week of February 13th, 2012
Date Est.
Time		 Release For Consensus Prior
02/14 8:30am Retail Sales Jan. 0.8% 0.1%
02/14 8:30am Retail Sales ex. Auto Jan. 0.5% (0.2%)
02/14 8:30am Export Prices ex. Ag. Jan. N/A (0.2%)
02/14 8:30am Import Prices ex. Oil Jan. N/A 0.1%
02/14 10:00am Business Inventories Dec. 0.5% 0.3%
02/15 7:00am MBA Mortgage Index 02/11 N/A 7.5%
02/15 8:30am Empire Manufacturing Index Feb. 14.0 13.5
02/15 9:00am Net Long Term TIC Flows Dec. N/A $59.8B
02/15 9:15am Industrial Production Jan. 0.6% 0.4%
02/15 9:15am Capacity Utilization Jan. 78.6% 78.1%
02/15 10:30am Crude Inventories 02/11 N/A 0.304M
02/15 2:15pm FOMC Minutes 01/25
02/16 8:30am Initial Claims 02/11 365K 358K
02/16 8:30am Continuing Claims 02/04 3,505K 3,515K
02/16 8:30am Housing Starts Jan. 675K 679K
02/16 8:30am Building Permits Jan. 675K 657K
02/16 8:30am Producer Price Index PPI Jan. 0.3% (0.1%)
02/16 8:30am Core Producer Price Index PPI Jan. 0.1% 0.3%
02/16 10:00am Philadelphia Fed. Feb. 10.0 7.3
02/17 8:30am Consumer Price Index CPI Jan. 0.2% 0.1%
02/17 8:30am Core Consumer Price Index Core-CPI Jan. 0.2% 0.1%
02/17 10:00am Leading Indicators Jan. 0.5% 0.4%