Tuesday, November 8, 2011
Move over Goldman Sachs. There's a new canary in the coal mine.
Ever since Bank of America gobbled up Merrill Lynch (or was forced by the Feds to stomach it), I've been searching for a new leading indicator for the short-term direction of the stock market. For nearly 20 years, I used shares of Merrill Lynch as the proverbial canary in the coal mine.
Merrill was a wonderful market timing indicator. If the market was going to rally, shares of Merrill Lynch rallied first. If stocks were due for a drop, Merrill would signal it ahead of time. I often wrote about Merrill's canary-like attributes (here, here, and here). And I mourned the day the shares stopped trading in September 2008.
Ever since then, I've been in search of a new canary. At first, the banking index fund (BKX) looked like a good candidate. But I found it moved with the market, rather than ahead of it.
Then I started using Goldman Sachs (GS). That worked OK for a while... But Goldman is not a true canary. It's a blood-sucking vampire squid, as Rolling Stone's Matt Taibbi once famously called it. And its performance as a leading timing indicator has been disappointing.
So I kept searching for a new canary... And I finally found it.
ExxonMobil (XOM) – the oil industry behemoth – is a leading market-timing indicator, and the market's new canary.
I've been following the minute-to-minute action in XOM shares for several months. The action is remarkably similar to the way shares of Merrill Lynch used to trade. If the market is rallying and shares of XOM start to pull back, sure enough, the stock market pulls back moments later. If stocks are falling and XOM begins to bounce, the market bounces, too.
So if you want to profit off the short-term direction in stock prices, pay attention to the action in XOM. It'll give you an early clue as to where things are headed.
I don't know exactly why it works this way. Likewise, I never exactly understood why Merrill worked so well as a leading timing indicator. But you don't have to know why something works to profit off it.
Merrill Lynch was a profitable canary for more than 20 years. I'm looking forward to a long, prosperous relationship with ExxonMobil.
Best regards and good trading,
Read how Jeff used Merrill Lynch to gauge the market's behavior for 20 years here: How a Canary Can Protect Your Portfolio.
Crude oil surges to a three-month high.
Silver miners are trying to start a new uptrend... Coeur d'Alene Mines and Silver Standard Resources touch their highest levels in over a month.
McDonald's and Starbucks hit fresh all-time highs.
Emerging market "trophy" Mercado-libre rockets more than 50% in the past month.