The Stock: Trilogy Energy Corp.
Trend: The recent rout of stocks was triggered by a sovereign debt catalyst, but the real concern is about the prospects for developed economies. Equity trend signals over the past quarter have been negative, so investor anxiety has been building toward elevated market volatility this week. A key indicator of concerns about economic growth is the significant drop in the price of crude oil – now down about 18 per cent since the end of June. Although continued monetary accommodation through low interest rates is a certainty, the market does not seem to think growth will prime energy demand or industry valuations.
The negative outlook has been reflected in the oil and gas sector for a while. Energy stocks have been trending downward since the spring, and the group has been labelled Stock Trends Bearish – along with the broader TSX market – for a month. The current collapse of crude oil prices, represented on the TSX by commodity exchange traded fund Horizons Winter-Term NYMEX Crude Oil Fund , put an emphatic bearish trend marker on the underlying commodity, joining the bearish trend of energy equity prices. If investors did not realize it before, this crucial sector is tempting even more selling.
Not all energy stocks were sapped through the summer session. Some managed to maintain relative share price performance while the sector has floundered. Among that group are drillers like Precision Drilling , Trican Well Service and Ensign Energy Services , as well as oil and gas producers like Celtic Exploration and Birchcliff Energy . But retreats in the past week by these previously winning sector performers should now prompt some profit-taking.
The Trade: An example of a positively trending outlier in a besieged sector is the stock of Trilogy Energy Corp. It has been Stock Trends Bullish for over two years, and enjoyed a strong rally for much of 2011, advancing from $12.30 to a peak of $29.20 a few weeks ago. But the share price has dropped below the intermediate trend line this week, which will prompt uneasy shareholders to take profits off the table now. Given the weak position of the sector, this initial retreat below trend does not bode well for an immediate revival of Trilogy’s stock.
The Upside: Abandoning a winning trade is not an easy thing in a bullish market. A bear market at least offers a cover by reducing risk in the face of growing or extreme volatility. Trilogy’s stock could drop another 8 to 10 per cent before some helpful support comes into play. Avoiding that risk is surely on some shareholders’ minds.
The Downside: The implication of a continued low interest-rate environment – or cheap money – is the inflationary spiral that fires up in both precious metals and commodities. Liquidity could find its way back into crude oil and energy stocks.
Skot Kortje has been analyzing stock market trends for 15-years using trend analysis. His Stock Trends indicators have been published by The Globe and Mail since 1995. For more go to Stocktrends.caReport Typo/Error
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- Trilogy Energy Corp$6.76+0.14(+2.11%)
- Crude Oil Front Month Futures$51.35+0.29(+0.57%)
- HBP Winter Term NYMEX Crude Oil ETF$12.45+0.19(+1.55%)
- Precision Drilling Corp$7.32+0.25(+3.54%)
- Trican Well Service Ltd$3.90+0.13(+3.45%)
- Ensign Energy Services Inc$9.39+0.16(+1.73%)
- Birchcliff Energy Ltd$9.35+0.14(+1.52%)
- Updated December 2 12:59 PM EST. Delayed by at least 15 minutes.