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Why You Can't Buy Oil Stocks – YetBy
Tuesday, January 6, 2015
Oil's at 50 bucks a barrel...
That's down from more than $100 a barrel during the summer – a truly massive price fall.
Shares of energy companies have been hammered, too...
XLE – the main energy-stock ETF (exchange-traded fund) – is down... from more than $100 this summer to closer to $75 as I write. Many energy stocks have fallen much farther than this ETF.
In short, it's horrible out there – particularly in oil investments.
After such an incredible fall, the bottom has to be near – right?
You might expect – after such an incredible fall – that I would be a buyer of oil companies now.
That's a reasonable guess... as you know that I look for investments that are cheap and hated.
I hate to disappoint you... but I am NOT buying oil companies – yet.
The reason is simple. Oil stocks are not hated enough – yet.
For the bottom to be here in oil stocks, investors have to give up on them. You want to be a buyer of oil stocks AFTER everyone has given up on them.
The problem is, the opposite is happening... Investors are getting extremely bullish on energy stocks.
As one example, you can see this in the shares outstanding of XLE – the largest energy-stock ETF (its full name is the Energy Select Sector SPDR Fund).
ETFs like XLE create and liquidate shares based on demand. So the total shares outstanding fluctuate depending on whether more investors are buying or selling.
And as you can see in the chart below, investors are buying up energy stocks through shares of XLE.
 XLE's shares outstanding have skyrocketed 30% over just the past seven weeks. They're now at an all-time high.
And it's not just XLE...
Last week, Bloomberg reported that "more than $3.13 billion went into exchange-traded funds holding stakes in energy stocks this month [December]."
In short, investors believe that energy stocks have crashed enough at this point, and they expect them to soar from here.
I think investors will turn out to be wrong here. My opinion has nothing to do with the fundamentals of energy (I am not an expert in energy). Instead, it's all about investor psychology.
Before I will consider buying energy stocks, I want to see "the crowd" become less enthusiastic on them. In short, we need energy stocks to become more "hated." Today, at this point, energy stocks are just not hated enough – yet – to interest us.
Also, I want to see a legitimate uptrend in XLE and in oil prices.
We don't have any of these things yet... so I am not buying – yet.
In short, after the huge fall in oil prices, everyone is buying energy stocks. I think it's too early. There's no hurry to buy.
We will have a fantastic opportunity to buy oil stocks someday soon. But that day is not here, yet...
Good investing,
Steve
Further Reading:
Steve also thinks it's too early to invest in Russian stocks. "Russia is cheap today," he writes. "But I'm not buying." Find out why right here.
But U.S. stocks still offer good value – even at record highs, according to Steve. "The U.S. stock market boom is nearly six years old," he writes. "But the fun ain't over yet!" Learn why Steve is so bullish here.
Market NotesPUT THIS DOWNTREND ON YOUR WATCH LIST Put copper on your watch list today... its weak price action is worth concern.
Regular readers know we monitor copper to get a read on the global economy. The metal is a vital ingredient in everything around you... like home wiring, plumbing, cars, electronics, and refrigerators. This "in everything" quality makes copper rise and fall with economic activity.
Last year, copper spent most of its time trading above the $3-per-pound level. But over the past three months, copper has dropped below that level and more. It's now trading at its lowest level in more than four years. In order for us to believe the global economy is on stable footing, we need the price of this vital building ingredient to stop hitting multiyear lows.
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