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My Favorite Post-Memorial

By Jeff Clark
Thursday, May 24, 2007

There's stupid. There's moronic. And then, there's Congress.
 
Congress just passed legislation that outlaws gasoline price gouging. Let's ignore, for a moment, the rather inconvenient truth that federal and state governments actually make more on a gallon of gas than does Big Oil. And let's focus solely on Congress' habit of closing the barn door after the horse is long gone.
 
Gas prices are up – way up. And this new legislation is meant to create the appearance that Congress is actually trying to do something to relieve consumers' burden at the gas pumps. I'm not so sure that'll happen. But there is one thing I am quite certain of…
 
Congress is a terrific contrary indicator.
 
By the time the folks in Washington D.C. get around to focusing their attention on anything other than their own re-election efforts, odds are the topic has peaked and market forces are already taking care of the issue.
 
So it's no surprise that wholesale gasoline prices right now – just as Congress rushes into action – are at the same level at which they peaked in each of the past two years.
 
In 2005, wholesale unleaded gasoline prices peaked at $2.42 per gallon, just ahead of a brutal hurricane season. We saw the same thing in 2006 as the media inflamed fears of Katrina II.
 
Whatever the reason for this year's rise, I think it's a pretty good bet we're seeing the makings of a top as we head into Memorial Day weekend. And that means that come next Tuesday, it'll be time to short the oil sector.
 
I was bullish on oil stocks earlier in the year. I turned cautious a few weeks ago and recommended taking profits in the sector. Now I'm outright bearish.
 
Newspaper headlines are screaming about gasoline prices. CNBC's talking heads are constantly chatting about it. The ladies on The View are arguing about it. And now Congress is doing something about it.
 
Seems to me like conditions are set for a top.
 
Then, of course, there's this chart of the oil-service ETF…
 
This is a terrific illustration of a bearish rising-wedge pattern. Most of the time, this pattern breaks to the downside and erases much of the previous gains. If that happens this time, then the oil sector is going to take quite a fall.
 
One way to profit on the decline is to buy shares of the ProShares UltraShort Oil & Gas ETF (DUG). This exchange-traded fund returns 200% of the inverse performance of the oil and gas index. So if the index falls 10%, then DUG rallies 20%.
 
Another way to profit is to buy put options on individual stocks in the oil sector. A 10% drop in the price of a stock can create gains of 50%-100% in put options. I'll be sharing a couple specific ideas with S&A Short Report subscribers next Tuesday afternoon.
 
In the meantime, don't worry too much about the pain at the pump. After all, Congress is on the job.
 
Have a wonderful Memorial Day weekend. And, if you're so inclined, raise a glass and toast to the men and women who made the ultimate sacrifice for this great nation.
 
Best regards and good trading,
 
Jeff Clark




Recent Articles
Market Notes
World's largest uranium producer, Cameco, at all-time high... up 1,025% in the past five years.
 
Leading drug distributor McKesson at new high, continues to lead the health care rally.
 
Housing rally underway... D.R. Horton up 7% in the past week.
 
More energy highs... Eni, ConocoPhillips, Royal Dutch Shell, Plains Exploration & Production, Kodiak, Petrobras, Canadian Natural Resources, and Schlumberger at 52-week highs.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 38.31 +1.4% -0.6%
Gold 138.07 +2.1% +16.3%
Silver 28.60 +2.4% +53.6%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 18.01 -7.1% -19.8%
Gold Stocks 581.56 +3.0% +17.0%
10-Year Yield 3.02 +0.7% -10.7%

World ETFs
Symbol Price
Change
52-Wk
USA 122.89 +0.3% +11.3%
Canada 30.50 +0.2% +16.2%
Russia 21.94 +1.4% +18.1%
India 37.85 +0.3% +22.3%
Israel 16.69 +1.3% +10.8%
Japan 10.64 +0.6% +6.5%
Singapore 13.73 -1.1% +18.8%
Taiwan 14.78 +0.4% +19.2%
S. Korea 57.31 +1.3% +23.4%
S. Africa 71.87 +1.4% +28.2%
China 44.42 -1.4% -0.6%
Lat.America 53.17 +0.7% +8.4%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 137.59 +1.0% +18.9%
Big Pharma 64.14 +0.0% -3.2%
Internet 72.07 -0.1% +23.4%
Semis 16.22 +1.2% +29.4%
Utilities 31.28 +0.2% +1.5%
Defense 18.52 +0.1% +10.6%
Nanotech 10.03 +0.4% +1.6%
Alt. Energy 10.08 +1.3% -3.3%
Water 18.49 +1.0% +14.5%
Insurance 16.14 +0.4% +21.1%
Biotech 20.54 -0.2% +28.1%
Retail 19.70 +0.3% +30.2%
Software 24.79 +0.8% +25.9%
Big Tech 53.87 +0.3% +22.7%
Construction 13.10 +0.9% +15.7%
Media 13.64 +0.5% +26.0%
Consumer Svcs 67.39 +0.2% +24.5%
Financials 55.04 +0.3% +7.4%
Health Care 64.30 +0.1% +2.0%
Industrials 63.54 +0.5% +21.0%
Basic Mat 74.35 +1.1% +25.3%
Real Estate 55.32 +0.1% +25.0%
Transportation 91.77 +0.7% +26.9%
Telecom 22.59 +0.5% +17.8%