For months I’ve been saying that oil company stocks are likely to be headed higher. This week’s explosive surprise to the upside was not a surprise to me.
While it’s great to be right, it’s even better to make money … and there’s a better way to make money on rising oil prices than by investing in the black gold itself.
In the middle of October, oil was trading just above $50. During the interim, the price of oil dropped to $43 and only this week moved back above $50 again on news of the OPEC agreement. The SSI chart for oil remains strong.
According to my volume-at-price (VAP) chart, this is the third time that oil has topped $50 this year. The previous two times, the price didn’t hold this $50 level.
This time, I think there’s a good chance that oil stays above $50. The commercial traders have been buying futures contracts, and the open interest has moved higher from where it was earlier in the year.
The time-cycle forecasts are also telling me that the path of least resistance is to the upside. This 8-year cycle is at its bottom and is forecasting higher prices for the next 4 years.
The short-term is also showing a move higher through the last week of December. This is a 65-day cycle.
Even the volatility has been rising towards its multi-year high. This is setting up to be very similar to the condition I wrote about earlier in the week about investing in stocks that have moved to multi-year highs in volatility.
With so many positive signals for oil, it’s probably surprising to hear me say, “Don’t buy it.”
Why would I say such a thing? Because most investors aren’t emotionally equipped to handle the ups and downs of the black gold itself.
I’ve written before that when it comes to oil the commodity vs. the companies that do business in oil, it’s the exact opposite of the situation with gold vs. the gold miners. Oil is more volatile than the companies in the energy sector whereas gold is less volatile than the companies in the gold mining business.
The chart below is a percentage change chart of oil vs. XLE (the Energy Select Sector SPDR® ETF) since the beginning of 2016. It shows the percentage change in the price of oil vs. the percentage change in XLE – the ETF composed of the energy sector companies in the S&P 500.
Both oil and XLE are up comparable amounts over the past 12 months, but oil has been a wild ride, whereas XLE has been climbing steadily since early 2016 without much drama.
I’ve personally owned XLE since late 2015, and I can tell you from first-hand experience that I’ve wanted to sell it multiple times in the past year, thinking that, “It can’t keep going higher from here.”
Thankfully, the head has prevailed over the heart … which is what happens when you learn from your mistakes and you have a robust, well-researched system that has consistently proven itself over an extended period of time.
It looks to me like XLE still has room to run. It has both the rising price of oil and rising stock prices as wind in its sails … all with a moderate amount of volatility.
Richard M. Smith, PhD
CEO & Founder, TradeStops