For Energy Plays Look to Flotek, Anadarko Petroleum

It was due and it was telegraphed but that didn’t make it fun or pretty. The drubbing in the stock market yesterday was something that had to happen and the fact that it hadn’t occurred sooner is the real surprise.

The S&P 500 was riding a four month high but the rebound was facilitated by the oversold circumstance the market was mired in earlier this year when it fell through a trapdoor. I think the market simply reached the crossroad where it's going to take a little more than being oversold to push through.

There was a silver lining yesterday and it was volume. I’ve griped during the entire rebound period about volume and a buyers' strike but the fact of the matter is sellers are still reluctant to pull the trigger. Sure, there was a heck of a lot more selling than buying yesterday, but the selling wasn’t anywhere near panic levels and considering how far and how fast the market has come on, certainly there was more than one legitimate excuse to bail.

Obviously one bad day out for investors that have been through the ringer isn’t going to get battle hardened investors to blink. I’m sure a lot of them squinted, however. We begin tomorrow with the S&P 500 hovering north of the 200-day moving average. The uptrend is intact but the index is nearing the key support point of 1,400. If that doesn’t hold then the last stand could come at 1,380. The flip side of this is the index holding above the bottom of the channel and rebounding. On the upside a move through 1,440 would be magnificent, especially after yesterday’s session. For the Dow, 12,800 is the pivotal swing point and the level to watch. At this point I think investors would be happy with sideways movement until there's clearer evidence things are getting better.

The Word from On High

After yesterday’s pile-on where legendary investors, one after another, echoed their opinions that there are still difficult times ahead, investors have mentally been ordered back to “Go” and they couldn’t collect $200.00. The fear is that the actual speedometer or major indices could retrace and somehow tumble back to the lows of February. Of course at this stage of the game some of those legends, while worthy of all praise and respect, still haven’t been elevated to deities. Although in the case of George Soros he does look like he might have posed for Michelangelo’s “Creation of Adam” of “The last Judgment”. There is no doubt that investors have been guessing as to the inflection point of the credit crisis and housing woes and maybe they’ve been wrong. The consequence of being wrong or early shouldn’t be punitive and that's why such optimism bubbled to the surface

I also think it would take a major disaster for equity markets to retest the lows and I happen to look forward to buying stocks on weakness. Yet I will concede the stock market is a long way from seeing a democratic blanket of buying, put the darts away, and be ready to buy stocks that may look and feel expensive even if there is a correction. This will be frustrating for so-called value investors, those folks that buy and hold stuff like drug company stocks because they change hands at discounted valuation metrics. I think the move could also be frustrating to the folks on Capitol Hill. Yesterday in the United States Senate the Committee on Homeland Security and Governmental Affairs took on the surging commodities market. In his opening statement the chairman of the committee, Joseph Lieberman, offered the following observations:



Consumers in low-income countries may spend as much as 80% of their income on food.
Somalia and 33 other nations are at risk of unrest that takes lives (World Bank).
Since 2003 investments in commodity index funds has surged to $260.0 billion from $13.0.

Essentially there was a series of testimony that more or less placed the blame for the surge in commodity prices on traders and speculators. There is no doubt that hot money is chasing performance but there are other factors, too, including lawmakers pushing for the use of food as fuel. It's a serious situation that deserves more than the normal rhetoric and finger-pointing from Congress. If it's only speculators then the situation will correct itself at some point but we know it’s a lot more complicated than nefarious and greedy traders manipulating the market and starving the world. Speaking of surging commodities, natural gas looks very compelling. I have to say my firm was getting waxed for months in this space which we loaded up on in the model portfolio in 2006. In fact we actually sent out an exit alert on Natural Gas Service Group (NGS) last month after achieving a 50% gain but now I regret being so impatient.

I think NGS will move higher along with Flotek (FTK) which has been an execution disaster but is oversold and finding a lot of buyers at this level. Another play in the space is Anadarko (APC) which does a little bit of everything but in my mind is a gas play, perhaps the best quality company in the space.