Why it's a bad time to buy oil stocks right now5/4/2011 7:21:42 AM | Jeff Clark, Growth Stock Wire
As Rick Rule is fond of saying, "When it comes to investing in natural resources, you're either a contrarian or you're a victim."
The "new high" list was covered with oil stocks last week.
That's no surprise. Oil is trading above $110 per barrel. It costs more than $100 to fill up my gas tank. Oil companies are swimming in profits and oil company shareholders are reaping huge gains. Take a look at this one-year chart of the AMEX Oil Index (XOI)...
The XOI is up 45% in the past eight months. Indeed, it has been a great time to own oil stocks.
Now, however, it's a bad time to buy them.
Right now, the oil sector is trading where it was back in June 2008. Back then, there was unrest in the Middle East. China and India were increasing consumption. We were entering the summer driving season in the United States. Every analyst within spitting distance of CNBC was bullish about oil.
Six months later, oil was trading for $40 per barrel... and the AMEX Oil Index had been cut in half.
Oil and oil stocks are cyclical. There's a good time to buy into the sector and a bad time to buy. June 2008 was a bad time to buy, and I warned you about it here. Oil investments were too popular. The industry was riding a perfect storm for profits. Everybody was projecting higher and higher oil prices.
Then oil collapsed.
It is eerily similar to today. Oil bulls point to turmoil in the Middle East, increasing demand from China, and a pickup in the U.S. economy as justification for ever-increasing oil prices. It doesn't matter that the price of oil is up 60% since September or that oil stocks are up 45%. "Get on board," they shout, "or you'll miss out completely."
Don't do it.
As my colleague and natural resource expert Rick Rule is fond of saying, "When it comes to investing in natural resources, you're either a contrarian or you're a victim."
Be a contrarian.
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Jeff Clark, Growth Stock Wire
Growth Stock Wire is free daily investment newsletter written by veteran market traders. Every morning, GSW readers receive a pre-market briefing on the day's most profitable investment opportunities.
[Johnny: I noticed on BNN last night an fund manager suggesting the same strategy. He was rotating away from oil, gold and silver and moving more into base metals. His assumption was base metal have a more to run and that oil, gold and silver were at a cyclical high.] |
