“You have to buy the oil stocks,” a financial television talking head proclaimed yesterday… “They’re under-owned, and the price of crude oil is headed higher.”
That seems a little late in the game to me. After all, the energy sector is up over 50% so far in 2021. And, many oil stocks are 70-80% higher today than they were this time last year.
Of course, that doesn’t mean that oil stocks can’t go even higher from here. They certainly can. But, the risk of buying them now, after such a large rally, is quite high. And, the potential reward may not be enough to compensate for that risk…
Besides, if history is any sort of a guide, patient investors will get a much better buying opportunity a few months from now.
Let me explain…
One of the best timing tools for getting in or out of the oil sector is the Energy Sector Bullish Percent Index (BPENER). This is a momentum based indicator that lets us know when the sector is overbought and ripe for a correction, or oversold and a good time to buy.
Take a look at this chart of the BPENER…
A Bullish Percent Index (BPI) measures the percentage of stocks in a sector that are trading with bullish technical patterns. It’s designed to measure overbought and oversold conditions.
An index is overbought when it registers above 80 – meaning 80% of the stocks in the sector are trading with bullish patterns. An index is oversold when it drops below 30.
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The red arrows on the chart point to when the BPENER rallied above 80 and then turned lower from overbought conditions. That action generates a BPENER sell signal. Usually, it’s a good idea to avoid owning energy stocks in this situation.
Here’s how those arrows coincide with the action in the Energy Select Sector Fund (XLE)…
In every case, XLE trended lower in the weeks immediately following a BPENER sell signal.
The signals didn’t necessarily justify taking a short trade and betting against the energy sector. But, they always provide a much better buying opportunity a few weeks after the signal.
The BPENER closed at 100 last Thursday – meaning 100% of the stocks in the energy sector are trading with bullish technical patterns.
And, it doesn’t get any better than that.
If it can’t get better, then it can only get worse. And, as soon as it gets worse, the BPENER will generate a sell signal.
Based on all of the previous signals this year, traders will do much better buying into the energy sector a few weeks after a BPENER sell signal than a few days before.
There’s no real urgency to jump into the energy sector right now.
We’ll likely have a chance to put money to work in the sector at somewhat lower prices in the weeks ahead.
Best regards and good trading,
In today’s mailbag, more readers wrote in about Jeff’s recent essay on rules and absurdity…
It’s not only ok, but it’s also really good that you write about these things. We can’t live in a fantasy world thinking that craziness isn’t going on, that many fools are leading our world in the wrong direction, and that these policies won’t affect the markets.
I say it’s time to expand our thinking about what makes the markets and the economy work the way they do and write openly. Then do what must be done to change things… before it’s too late.
Awesome writing today – you have captured the true thoughts of many Americans regarding the current state of government! Clearly, you can see the ridiculous contradictions in our communities these days.
All on celebrations in my world – no one can destroy my happiness!
Dear Jeff, outstanding essay! The really sad and scary part is that it’s not too much of a stretch to see this in the U.S. as it seems that few politicians are pushing back. There are some but not nearly enough as they seem to prefer to remain quiet to “not stir the pot,” while their opponents are constantly loud and constantly stirring. It’s time for “We the People” to put a stop to the madness once and for all.
Jeff, I loved your essay “Rules Are Rules” especially the prayer at the end of it. The best way to expose absurdity is by being absurd, as Rush Limbaugh was so good at pointing out.
Thanks for your daily messages along with your trading services!
However, it wasn’t all positive… take a look at one reader’s comment…
No need to politicize COVID more than it already is, Jeff.
Fauci said nothing about whether people would be “allowed to celebrate Christmas.” Neither he nor Biden have the power to tell you whether or not you can celebrate Christmas.
He was asked in his capacity as a public health official whether Christmas gatherings as normal would be a good idea this year given where we are with COVID. “Too soon to tell” whether we are all-clear, or still should be careful. After all, Delta looks like it has peaked, but we have the cold weather arriving, which typically increases the transmission of respiratory infections.
This cancel Christmas BS is just more Faux News talking points. I liked the satire of your story, but what could otherwise have been a funny light touch about, yes, the sometimes-absurdity of living through this seemingly never-ending pandemic instead was poisoned by the bitterness of your opening paragraphs. It’s not helpful.
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at [email protected].