Serious changes are under way deep in the bowels of the stock market. Tectonic shifts and rumbles suggest investors are beginning to worry. They're worrying about high inflation and its impact on growth. And they're worrying about the ongoing procession of disappointing economic data.
Sure, glamour issues like Apple (APPL) continue to power higher since investor sentiment, overall, is still juiced up by the promise of more easy-money stimulus from the Federal Reserve. But the serious, somber stocks, issues like ConocoPhillips (COP) and Caterpillar (CAT), have rolled over badly and are well off their highs.
The most dramatic downturn is in energy, with the Energy SPDR (XLE) returning to levels hit back in October as it plunges nearly 8% from its February high. This suggests big trouble for the overall market, as energy (and materials and industrials like CAT) tend to be the first movers of any new significant market trend. And right now, they're spilling lower.
The problem is overall economic weakness caused by high demand destroying energy prices. With the price of gas so high, consumers and businesses cut back spending elsewhere -- which explains the drop in manufacturing new orders, for instance -- while they also, where they can, reduce their expenditures on gasoline and diesel.
Thus the dramatic drop in U.S. energy use, which is falling at around an 8% annual rate right now, according to Bank of America Merrill Lynch.
This is a double whammy for the energy sector. With big national state-owned energy companies like Saudi Aramco controlling the vast majority of new exploration and development projects, oil and gas companies are increasingly reliant on the "downstream" refinery business. That's the worst place to be in this environment, as costs are higher (crude oil) while demand is lower (lower consumption).
That limits the ability of refineries to pass along costs by jacking up gas prices. No wonder refineries across the country are shutting down, aggravating the problem for drivers.
For nimble traders, there are plenty of opportunities to profit from all this. I recommended betting against the energy sector weeks ago via the Direxion 3x Energy Bear (ERY), which is up 8.5&% since I added it to the Edge Letter Sample Portfolio on March 21. To capitalize on the ongoing weakness, I'm adding a short position in ConocoPhillips and PennWest Energy (PWE) to the portfolio.
I found COP and PWE with the help of technical screens developed with Fidelity's Wealth Lab Pro back-testing tools, which you can find here. (Fidelity sponsors the Investor Pro section on MSN Money.)
Check out Anthony's investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up. Contact Anthony at anthony@edgeletter.com and follow him on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.
Right jlum----but you can fool ALL of the people SOME of the time. That's pretty obvious.
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