As I wrote back in August of this year, oil catches fire … and burns hot. At the time I predicted that more gains in oil were ahead. Oil is up a solid 25% since then … with more room to run.
Of course, as I’ve said many times before, being right and making money are two completely different things … and the energy markets continue to be some of the hardest markets to make money in.
For the gold investors out there, there’s an interesting inverse relationship to note between the gold markets and the energy markets. When it comes to gold, the commodity itself has low volatility (VQ = 11.6%) but the companies that do business in gold are very volatile. The VQ on GDX, for example, is 36.8%.
With oil, however, it’s exactly the opposite. The commodity itself is extremely volatile (current VQ = 30.5%) while the companies that do business in oil are lower volatility. The current VQ on XLE, the energy company ETF, is only 18.2%.
Keep that in mind as you think about how to best make money in energy.
Let’s take a look at where things stand today when it comes to oil and the companies involved in the business of oil.
As I said, oil is volatile … and we can see the impact of that volatility in the fact that oil hasn’t even triggered a new SSI Entry signal yet … in spite of being up over 60% year to date. Here’s the current SSI chart on West Texas Intermediate Crude.
We’ve had a strong move off a bottom and the trend has started turning up but hasn’t yet built up a full head of steam. I’m expecting oil to move into SSI Green Zone any day now … but the fact that it hasn’t done so yet tells you a lot about how volatile oil really is.
When we take a step back and look at more of the history of oil prices, we can see the bigger picture … and see what price-levels have had the most volume.
The most amount of activity (volume) in oil prices over the past 10 years has taken place around the $45 price level. That’s been the battle line for the past two years … and the action over the past couple of weeks has clearly put us on the top side of that battle line.
My time-cycles analysis also continues to be strongly bullish for oil through the first half of 2017.
But like I said, oil is volatile … and just because all of the stars are aligned for oil to move higher, doesn’t mean that it’s easy money. Oil could easily drop 25%, scare the daylights out of everyone, and then resume its march higher … all in the normal course of business for oil.
For those lacking the stomach for that kind of volatility, the companies involved in the oil business provide a more stable opportunity.
XLE is the ETF covering the companies from the S&P 500 that are involved in the energy sector. It is a lot less volatile than oil itself (18.2% vs. 30.5%) and is highly correlated to the price oil. It triggered an SSI Entry signal back in April and has climbed steadily ever since.
The two biggest component stocks of XLE are Exxon Mobil (XOM) and Chevron (CVX). Together they make up about 30% of the weighting of XLE. Both have strong SSI charts.
Chevron is the more volatile of the two oil majors with a VQ of 19.2%. It has a current dividend yield of 4.2%.
Bottom line … energy prices are on the rise and will likely continue to rise. There are various ways to take advantage of rising energy prices and they’re not all created equal.
Opportunities abound. The question is, which opportunities are right for you?
Richard M. Smith, PhD
CEO & Founder, TradeStops