It’s enough to test anyone’s resolve.
September is over.
Historically, it’s the worst month of the year for stocks.
Stocks, measured by the S&P 500, fell 4.8%.
But now we’re in October.
And the market has fallen further.
So, you may wonder – is the worst really over? And just as important, what is the best opportunity for investors today?
We’ll share Casey Research’s take below…
If this is your first time reading the Dispatch, welcome. If you’ve been here before, welcome back.
At the Dispatch we have two goals:
- To introduce you to the most important investing themes of the day, and
- To show you how to profit from them.
We do this by showcasing ideas from our in-house investing experts: Dave Forest and Nick Giambruno. And from the founder of our business, Doug Casey.
Today, we’ll continue to look at the market’s volatile action, one sector that bucked the trend in September, and whether that sector is still a buy today…
September Was a Great Month for This Sector
Let’s make one thing clear.
Although September is historically a bad month for stocks… and although the S&P 500 fell 4.8% during the month… not everything fell.
For instance, energy – one of Casey Research’s favorite sectors – had a great month.
Looking at the Energy Select Sector SPDR Fund ETF (XLE), it gained 9.2%. Compare that to the Technology Select Sector SPDR Fund ETF (XLK). It fell 6%.
You can see this in the chart below:
This tells us two things.
First, it confirms our take that there is almost always something worth buying.
You just have to look past the broad market index, and instead, look for more specific opportunities.
For September, one of the best opportunities was the energy sector.
It’s why Dave Forest and his Strategic Trader team took the opportunity to add two energy-related plays to their buy list last month.
So far, it’s paying off. One of the positions is up 36.8%. The other is up 156.2%.
And that’s in just two weeks.
It’s not surprising energy companies are doing so well. The oil price has increased from $50 per barrel since the start of this year to $78 today.
Natural gas has more than doubled over the same timeframe, from $2.50 per mmBtu (million British thermal units) to $6 today. It has gained more than 40% in the last six weeks alone.
The reason? Reopening economies and energy shortages in Europe have partly caused these rises.
“Demand for Energy Has Roared Back”
Not only that, but perhaps investors realize that despite the rise in “green” energy, fossil fuels are just as important to the world’s economy today as they were before the COVID-19 pandemic.
As Reuters reported yesterday:
Demand for coal and natural gas has exceeded pre-COVID-19 highs with oil not far behind, dealing a setback to hopes the pandemic would spur a faster transition to clean energy from fossil fuels.
Global natural gas shortages, record gas and coal prices, a power crunch in China and a three-year high on oil prices all tell one story – demand for energy has roared back and the world still needs fossil fuels to meet most of those energy needs.
This supports Dave Forest’s view that as demand increases, so does the price. And that results in increased production. From the perspective of energy investors, it’s a virtuous cycle – or a vicious cycle if you dislike fossil fuels – that will continue until supply reaches a level that causes a glut, leading to falling prices.
It’s anyone’s guess as to how long that will take to play out.
But given the length of time it can take for oil and gas companies to bring new production “onstream,” it’s likely to be months or even years, rather than weeks.
For that reason (among others), Dave is still fully behind the oil and gas story.
But that doesn’t mean you won’t see some pullback in stock prices in the short term.
Whenever one sector outperforms another, big investors often like to take money from the winning sector and switch to an underperforming sector. So that could happen here.
(In investment terms, that’s known as “rotation” – selling one sector and buying another.)
But even so, the oil and gas story is still at the early stages of recovery. Big oil companies like ExxonMobil (XOM) are only just becoming profitable again.
While the number of active drilling rigs in North America has doubled over the past year (according to oil services company Baker Hughes), it has been a gradual increase. That means most of the rigs haven’t yet delivered a full year of production.
And that means there is still plenty of revenue (and profits) yet to hit company financial statements.
Energy to Be the Market’s Top Play for 2022
Dave Forest has banged the proverbial drum on the energy rebound story for months. So far, it’s playing out exactly as he said it would.
In short, although the energy sector has had a great month, while other sectors fell, Dave believes there are still more gains to come.
How to play it now? The simplest way is through something like the Energy Select Sector SPDR Fund ETF (XLE). It provides broad exposure to oil and gas stocks.
It’s up 88% over the past year, but it’s still down 22% over the past five years.
As production increases and more rigs restart in the coming months, we see little reason why the energy sector can’t be the best-performing sector in 2022.
Editor, Casey Daily Dispatch