Two Chicks and a Hammer.  Flip or Flop.  Las Vegas Flip.  Fix it and Flip It.  There is no end to the television shows about buying a rundown house, repairing it, and selling it for a profit.  It’s like day trading internet stocks in 1999, everyone is quitting their day jobs to get into the racket.  And just like in 1999, these people do not understand about the risk they are taking, where the trouble might come from, and what reward they should expect for taking these risks. 

Real estate is doing well, but not all parts of the sector.  In the commercial space, offices and retail are getting hammered while warehouse, distribution and logistics centers are trending higher.  The genuine star of real estate, however, is the residential group, specifically single-family homes.  Large rental divisions are not keeping up because of Covid-19 related moratoriums on rental collection.  It is the American dream to own a home, and that dream is reflecting one of the hottest markets in the global economy today.

Possibly from the beginning of human economic activity until recently, real estate went up during inflationary times.  Inflation simply means rising prices, which can take place in specific pockets as well as the big picture.  Internet stocks experienced inflation in 1999 while everything else was deflating.  The last time the US economy saw broad based inflation was the 1970’s as oil prices shot up and everything else from food to real estate pushed up.  Real estate has always been a way to protect and profit during periods of inflation.  Well, not anymore.

As long as America avoids a full-scale war with China, we will never live through another period of rapidly rising prices in the stuff we buy to survive.  I realize this is a shocking statement to some of you, especially if you worked during the 1970’s.  But carve my words in stone, bury them in a time capsule, dig it up every 10 years for a century and I will still be proven correct.  Prices can rise for short periods of time here or there, but real inflation in our lives is dead.  Forever.

If inflation is dead, why are residential real estate prices going up so much lately?  Interest rates.  The market is being entirely driven by the all-time low interest rate environment we have been in since March.  I know a lot of people attribute it to covid.  Work from home is spiking home related projects.  Lower spending on entertainment and other areas is increasing spending power for the house.  None of that matters nearly as much as interest rates.  If 15-year mortgages were five percent instead of half that amount, the residential market wouldn’t be this crazy.  It is all about the low interest rates.  Don’t believe me? Here is the proof.

Global interest rates are primarily set by the US government 10-year bond.  The 10-year is the benchmark that everything else pings off.  America was paying just under two percent in January to borrow money for 10 years.  That rate crashed to less than a half a percent in early March as world economies came to a stop.  Interest rates then began to fall in every corner until a few months ago when people could get a 15-year mortgage at less than three percent.  Free money to buy a house, and that is exactly what people have been doing.

Housing related stocks have soared since March as the tide has lifted every boat in the group.  Home Depot stock has doubled.  ITB, a basket of home building companies, is up 130%.  PKB, a basket of construction related firms, has advanced 150%, and PFSI, a mortgage service provider, has screamed ahead by 350%!  It has been 15 years since this group did as well.

Here is the thing.  The US 10-year plodded along near those low levels from late March to early June, when a spike took it to 95 basis points (just under one percent, or 100 basis points).  All housing related stocks immediately pulled back.  The 10-year receded until the middle of August and guess what?  All housing related stocks went back up.  As the 10-year jumped in August, housing stocks fell again.  Over the last two weeks, the 10-year ran up to its highest level since early June, hitting 87 basis points last week.  Housing stocks fell right on cue. 

The correlation between interest rates and the housing market will stay in place for quite a while.  It is unlikely that America will ever see a crash in the housing market was like 2008 when prices in some areas like San Diego and Las Vegas dropped by 60% or more.  If interest rates keep rising, however, home prices will stop rising as fast and may even go slightly negative.  That will be enough to put the Two Chicks and a Hammer back in the toolbox for a bit. 

The federal reserve still has enough ammunition and a conducive environment to maintain their agenda of steady, but somewhat low interest rates for a few years at least.  The 10-year is probably locked in a trading range of 65 to 140 basis points for, well, 10 years.  These are some of the best tools you need to keep your investing house in tip-top shape.
 
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Bottom Line
Emotions are high these days, and that can be easily seen in the stock market tool that measures the intensity of the swings, called the VIX.  The VIX jumped up the last three days, closing at its highest level since June 11th.  This is presenting us with the opportunity that I’ve been waiting for since September 2nd when TradeHawk sold a bunch of stock (at the EXACT high up to that point).  The Beach already mentioned that it is once again time to be heavily invested in stocks.  That idea is being emphasized here.
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There are several internal stock market indicators that have exceeded their September 2nd levels, while stock market prices have yet to do so.  The 80-year history of these indicators suggests prices will follow over coming months.  I fully appreciate that many of you are nervous, anxious, and concerned.  I am not.  And when it comes to your investments, I suggest you should not be either.  Stocks may continue the recent turbulent behavior for another few weeks, but the best probability outcome between now and February is a resumption of the intermediate uptrend which should take stocks to new highs and beyond.
 

Many opportunistic traders/investors are contemplating taking advantage of these low-energy prices.

After all, starting off the week, U.S. oil benchmark crashed to $1 per barrel for its lowest close and biggest one-day fall on record.

This just might be a juicy opportunity for investors willing to ‘buy and hold.’ Needless to say, we are more than likely setting the stage for a significant bottom in oil.

The old adage “don’t catch a falling knife” should generate a healthy dose of fear to any consciously wary trader. And at the very least, it should trigger a responsible flight instinct.
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Nevertheless, the reason investors are eager to place their financial necks on the proverbial chopping block is because oil is down—and by a lot. The price of each barrel is off more than 70% from December 2019.

The shale drilling revolution unleashed a production rush that eventually allowed America to become the number one oil-producing nation on earth—and that includes the U.S. out producing Saudi Arabia and Russia, too.

U.S. oil futures have dropped to their lowest prices since early 2002. Gas prices have hit a 10-year low. The average national price for regular unleaded gas stands around $1.785 per gallon at the time of this publication.Prices throughout the energy sector are down across the board. But, indiscriminate, unfocused buying is not a prudent approach to responsible investing—especially in today’s extreme market environment. Picking bottoms never work.
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With a proper technical and fundamental understanding, a spectacular opportunity of gain may await those ready to wade into the bloodied oil fields of today.

But for some, placing hard-earned profits in the energy sector makes a stomach a bit squeamish—and rightfully so. Many analysts are expecting a wave of bankruptcies that will keep the lawyers, courts, and accountants busy for years dealing with the aftermath.
 
Companies were formed, loans were taken, equipment was purchased, and wells were dug. Companies are being murdered in this environment. The question is, who will die on the vine and when will it happen?

Six years ago, a basket of stocks from the oil services group (OIH) peaked at $57 per share—up from $20 in 2008. EOG Resources (EOG) went from $20 to $120 during the same time. Yummy, right? Well, today it hovers around ~$40.


The breakdown of the energy sector was technically obvious to us skilled traders. Longs were closed out when key support levels were violated. The savviest of traders have been short in this sector and now looking to buy-to-cover to lock in some nice profits.
The opportunity we may have before us to buy oil right now is certainly tempting, and crude oil lows may be getting close to being set. When it’s time to buy, we expect gains to deliver significant upside potential.


Entering this market will require a high skill level in technical analysis. Price action will show us a trend reversal pattern to key on. This is critically important.


Here is what we know: oil will not go to zero. Today we crashed below $1, down from $107 only a few years ago. The growing pursuit of alternative energy will not wipe out international demand for oil for decades. And a few select companies, even operating under incredible stress, will thrive and survive for decades (e.g., Anheuser Busch survived prohibition).


Keep in mind that bottom fishing, to this degree, requires more than simply buying a basket of energy stocks and hoping for the best. We must be more intentional and savvier in our investing approach.


Although, XLE and OIH are down an incredible amount from their 2014 highs, over the next several years, large buckets like these are not expected to outperform the stronger sectors such as technology and healthcare. In other words, it might be smarter to target individual equities instead.


Consider the following technique to potentially increase your probability of success:

1. Identify and research fundamentally strong stocks within the energy sector
2. Watch the weekly charts on the baskets, XLE and OIH. Wait until a trend reversal pattern (i.e., double bottom, triple bottom, inverse head and shoulders, or falling wedge) is identified.
3. Buy an equal amount of, say, six stocks. Expect up to four of the six to eventually go bust. But the others, which do not, will probably pay extraordinary gains.

Within three years you will most likely have made a barrel of money.

In short, if you are short term look at the daily charts. If you are more long term, watch the weekly charts and identify a sector bottom, place an equal dollar amount into six stocks, and wait two to three months or roughly three years or so.


This strategy is not a spectator sport. Watch the charts on various timeframes to when to buy, and when to exit to maximize profits. Expect a short-term payoff in as little as two months. But the big play is waiting, say, three years after purchase. And, if Christmas comes early, reallocate your profits into other juicy trading opportunities.
 
To help you, below are six securities for you to research (in no particular order):

• TC Energy--TRP
• Cabot Oil--COG
• Genie Energy--GNE
• Magellan Midstream--MMP
• Matrix Service Company--MTRX
• Drill Quip--DRQ
  
  

I have 22 years trading experience using technical analysis. To become a savvy trader, you must stop approaching your investing like a gambler. Most traders are nothing more than gamblers HOPING to make a profit. If you’re in your 20s, more power to you. But if you are in your 30s or older, you do not have the luxury to gamble. That will kill your account faster than going to Vegas. You must get this right or you’ll be (for a lack of better words) “victimized” by the rest of us who are far more savvy and educated.  

You NEED a professional trader to mentor you. That’s the secret. This is precisely what Mark (the Meerkat) and I have found to be true in our own trading development. We both have been mentored. Matter of fact, I had two mentors. Successful traders are developed by other successful traders. Period. You can’t learn to ride a bike in a seminar or ask a book a question. It’s about being mentored. https://www.groktrade.com/tradingmentor.html

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