This 100% Gainer is an Immediate Sell or Short
If tax rates rise and government spending slows next year, the economy is expected to fall into a recession, according to the nonpartisan Congressional Budget Office. Some political pundits insist that Congress and the president will do all they can to avoid a recession, but economic growth is determined by a number of factors and political will alone has never avoided a recession.
Rather that watching Washington for clues about economic growth, traders can watch oil prices. In the past, recessions have been associated with oil price spikes. In the chart below, created at the Federal Reserve's website, the 12-month rate of change (ROC) is shown for oil prices. The gray bars highlight recessions, a standard feature on all charts created with the Fed's data.
The annual ROC of oil prices has spiked above 80% five times since 1970, and a recession followed four of those spikes. In 2010, however, oil prices rose as the global economy recovered from a deep recession and growth followed the price spike.
Now, oil prices are high but the ROC is low, which indicates that consumers and businesses have had time to adapt to higher prices, and the price of oil is not pointing toward a recession, decreasing the odds that the economy will fall off the fiscal cliff in early 2013. There could very well be a recession in 2013, but traders should not count on one to support their trading ideas.
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Even if there isn't a guarantee of a recession, this analysis still points toward a trade. There are some oil companies that have become extremely overbought, and even if the economy grows strongly, it's doubtful these companies can move much higher. Tesoro (NYSE: TSO) tops the list of short candidates among oil stocks.
TSO owns and operates seven refineries with a combined crude oil capacity of 665,000 barrels per day. This business can only increase profits if oil prices rise sharply. That seems like an unlikely prospect, because while the United States may avoid recession, economists seem certain that it will also avoid strong growth, as will most of the rest of the world. Oil prices rise when economic growth accelerates.
TSO also operates almost 1,400 gasoline stations and convenience stores. Growth is expected to be slow in this segment, as well. Analysts expect TSO to maintain steady growth of about 8% a year for the next five years. It has a price-to-earnings (P/E) ratio of about 8, making it the kind of stock value investors often look at. But one problem that value investors may have is the overbought condition of the stock.