A Perfect Trade for a Tough Market

I believe the odds of a double-dip recession in 2011 are high — very high. The U.S. and global economies are struggling.

You might think that good earnings reports here in the United States are indicative of an economy on the mend, but I suspect it is nothing more than a nadir for most companies. The bar to outperform last year’s dismal numbers was set very, very low.

Add to this that companies are trying to recognize revenue this year instead of next year when new taxes could hit everyone, including businesses. Some studies show that for every +1% increase in taxes, it results in a -1% decrease in GDP. If those studies are correct and if our GDP is growing by only +2% or +3% in Q1 of 2011 without the tax hikes, the net impact of tax increases could easily push GDP back into negative territory and potentially into another recession.

#-ad_banner-#Europe is now into a program of raising taxes and cutting spending. This is not, in the opinion of many economists, a strategy for growth. If the EU does not grow, its financial woes could exacerbate.

I don’t think it takes a professional chartist to see the next couple of months could be ugly if you are long in this market. But if you were following my Mastering the Markets premium trading letter closely this year, your portfolio would have gained money while the S&P 500 has lost ground.

Has every trade been a winner? Nope. But that doesn’t mean that I’m unhappy about beating the market in the first six months of a very tough market.

The bottom line is this: if U.S. and global economies move toward another recession or they remain tepid at best, the outlook for an increased demand for energy (oil and gas) could be significantly dampened. Yes, the moratorium on drilling for oil in the Gulf of Mexico will put more pressure on the supply side and could push oil and gas prices higher, but I have a lot of concern that the investor appetite for the energy sector will wane almost in direct proportion to the declining economy.

With these points in mind, I want you to consider the chart below of the Energy Select Sector SPDR (NYSE: XLE). I think this exchange-traded fund (ETF) looks poised to move lower during the next five to six weeks and could be a source of decent returns if shorted.

XLE represents the Energy Select Sector. The top holdings of the ETF are: Anadarko Petroleum (NYSE: APC), Apache (NYSE: APA), Chevron (NYSE: CVX), ConocoPhilips (NYSE: COP), Devon Energy (NYSE: DVN), Exxon Mobil (NYSE: XOM), Halliburton (NYSE: HAL), Occidental Petroleum (NYSE: OXY) and Schlumberger (NYSE: SLB).

This sector has been dropping for the past 10 days and looks to continue lower for the next five weeks. There is no guarantee as to how low this drop could be, but -10% or more is certainly possible.

Action to Take–>  I have two other picks that could handsomely profit from market weakness in my Mastering the Markets premium letter, but I think this fund looks poised to move lower during the next five to six weeks and could be a source of decent returns if shorted.