“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.
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,
Editor, Market Minute