“I love the oil stocks,” a financial television talking head proclaimed yesterday… “With all the unrest in the Middle East the price of crude oil is headed higher. And, with oil above $80 per barrel, the oil companies are printing money.”
Maybe so. At this point, though, it seems a little late in the game to be buying the oil stocks. After all, the energy sector is up 15% so far in 2024. It’s up 30% from this time last year.
Of course, that doesn’t mean that oil stocks can’t go even higher. 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.
The blue 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.
We’ve had three BPENER sell signals over the past two years. Here’s how those signals coincide with the action in the Energy Select Sector Fund (XLE)…
In each case, XLE trended lower in the weeks immediately following a BPENER sell signal.
The signals don’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 91 last Thursday – meaning 91% of the stocks in the energy sector are trading with bullish technical patterns.
It doesn’t get much better than that.
If it can’t get much better, then it can get worse. And, as soon as it gets worse, the BPENER will generate a sell signal.
Free Trading Resources
Have you checked out Jeff’s free trading resources on his website? It contains a selection of special reports, training videos, and a full trading glossary to help kickstart your trading career – at zero cost to you. Just click here to check it out.
Based on the few previous signals over the past two years, 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,
Jeff Clark
Editor, Market Minute