This column was originally published on RealMoney on Sept. 20 at 2:00 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.
A slowing economy, a hurricane-free Gulf of Mexico, luck on the geopolitical front and the unwinding of speculative positions seem to have burst the energy bubble: Nymex crude oil has declined 22.5% from its all-time high of $78.40 set on July 14 to this morning's low of $60.75 per barrel. A longer-term secular uptrend remains in place, but for the short-term, the need to find alternative energy sources suddenly seems less pressing.
With most of alternative energy's go-to names now much lower than they were in early August, it's certainly not the best time to take profits on or add to core positions. That said, it's also not yet time to exit the group. We haven't seen the last of higher oil prices, which tend to inspire interest -- and tradable volatility -- in stocks related to alternatives.
Take a look at what's going on now in oil to get a feel for what could affect alternative-energy stocks. The secular bull market in crude oil began after a low of $10.35 per barrel in December 1998. After crude hit a high of $37.15 in September 2000, the first correction achieved a low of $17.12 in November 2001. A solid uptrend followed, until the bubble peaked in mid-July this year.
Even as the bubble was inflating and energy bulls were calling for crude oil to reach $100 per barrel oil, my model suggested otherwise. My price target for crude remains my annual support of $51.87, which appears achievable by the end of 2007, if not sooner. This is likely to line up with a test of the 200-week simple moving average, which was rising at $47.60 this week when last tested as the secular uptrend back in October 2003, when this average was $29.95.
With decreased demand for energy and the big oil find in the deep waters of the Gulf of Mexico, alternative sources of energy will be put on the back burner. While it may take up to three years to pump oil out of the deepwater field, energy experts say that alternatives such as ethanol may take 10 years to reach critical mass.
This hasn't gone unnoticed in the alternative-energy community. Frank Curzio
pointed out in the Columnist Conversation on Tuesday that Hawkeye Holdings, the third-largest ethanol producer in the U.S., decided to delay its IPO -- temporarily -- due to the recent pullback in the energy segment. Curzio also pointed out the poor performances of ethanol IPOs
( AVR), which began trading on the
Aug. 29 at $39 a share and has since traded below $24, and
( VSE), the second-largest ethanol producer in the U.S., which debuted on June 15 at $28 a share and now trades around $18.
So as alternative energy takes a back seat to mainstream fuels, check out the current profiles for several alternative-energy names, which I last updated
Curzio pointed out that
Archer Daniels Midland
is the number-one ethanol producer in the U.S., but only 19% of its operating profits are ethanol-based. Even though ValuEngine rates the stock a buy, the weekly chart profile is negative. With this profile, I'd be patient and not add to an ADM position unless there was weakness to my semiannual value level at $33.47.
remains a buy, according to ValuEngine, but there's good reason to adopt a cautious investment strategy. I'd be patient here, too, and wait for weakness to my quarterly value level at $31.05 before adding more shares.
( ESLR), a solar energy play, is down 26.8% since mid-May. Currently 10.9% undervalued, it appears headed for a test of its Aug. 14 low at $7.99. Caution is the watchword here because my model does not show a value level at this time that would act as support.
operates three businesses: alternative energy, coal-combustion solutions and construction materials. The energy play here is in converting coal to a solid alternative energy. Since July 18, the stock has successfully stayed above $20.50 in a pattern similar to what we've seen in housing-related stocks. I don't show a value level for Headweaters, which supports adopting a cautious attitude toward the name. The weekly chart profile is positive, so there is a potential trade up to the 200-week simple moving average at $26.15 as long as weakness holds my monthly pivot at $22.99 and five-week MMA at $22.88.
bottomed at $17.20 on Aug. 16 and rebounded above my semiannual pivot, now a value level, at $18.49. In the process, the weekly chart profile shifted to positive. Investors should consider reducing positions on strength to my monthly risky level at $26.06, given a lagging fair value at $19.84. Consider protecting gains using a sell-stop in the case of a weekly close below the five-week MMA at $23.03.
appears to be headed for a retest of the Aug. 15 low at $14.58. I don't have a value level near that low at which to consider adding to this position. Fair value has declined to $20.83 from $30.25 since Aug. 10. With the weekly chart profile oversold, this is not a stock I would sell at this time, but I sure would wait for a better profile before I considered adding to this position.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider MGP Ingredients to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.
At the time of publication, Suttmeier had no positions in the stocks mentioned.
Richard Suttmeier is president of Global Market Consultants, Ltd., and chief market strategist for Joseph Stevens & Co., a full service brokerage firm located in lower Manhattan. Early in his career, Suttmeier became the first U.S. Treasury Bond Trader at Bache. He later began the government bond division at L. F. Rothschild. Suttmeier went on to form Global Market Consultants as an independent third-party research provider, producing reports covering the technicals of the U.S. capital markets. He also has been U.S. Treasury Strategist for Smith Barney and chief financial strategist for William R. Hough. Suttmeier holds a bachelor's degree from the Georgia Institute of Technology and a master's degree from Polytechnic University. He appreciates your feedback;
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