In response to the agreement between a number of oil producing nations, the market behaved in an extremely predictable and typically overreactive manner yesterday. Oil and energy services stocks surged dramatically at the opening, then backed off during the remainder of the session. Gold shares soared in response to renewed fears of inflation, an opinion that, as we saw, was not echoed by the bond market. Of course, the airlines took a solid beating, as the market conveniently overlooked the fact that they did not have any trouble raking in the dough when oil prices were considerably higher than they are right now. As I had also anticipated, those investors who decided to buy the Energy Services fund at the opening are now sitting on a loss of about 1.4%, while those who disposed of their holding in the Air Transportation fund at the opening, sold their shares at what turned out to be its lowest price of the day.
I believe that what took place in the market yesterday is far less important than what will occur today and tomorrow. Where the energy sectors are concerned, we have now reached the point where traders are going to have to make some important choices. One, lock in the extraordinary gains they may have made over the past four days, or two, continue to add to their current positions, thus demonstrating their conviction that these funds will keep marching to higher ground. The other decision, specifically whether it is now too late to join the party, now needs to be made by those investors who did not participate in the sudden surge by the energy related issues. When one considers the track record of the Energy Services fund at times like these, I would expect to see hesitancy to make a commitment on the part of the investor who has been on the sidelines until now, and a strong desire to lock in profits on the part of the short term traders.
Where the Energy Services fund is concerned, it has now advanced by an incredible 17.5% in the past four sessions. Obviously, anyone who decides to buy this fund at this point in time should not expect its future gains to come at anywhere near this pace. In addition, as often happens after a fund breaks through a significant resistance level, it may need to first pull back a bit, and successfully retest and hold these levels on the downside, before starting its next move upward.
From purely a technical standpoint, of course, the Energy, Energy Services, Natural Gas and Natural Resources funds have moved into what would, under normal circumstances, be classified as Buy territory. All things considered, however, I believe that the risk of near-term profit taking, and what could be a particularly painful whipsaw is extremely high at this time. Obviously, there is nothing we can do about not making money in these funds over the past four days. That is, however, not a good enough reason to jump in with both feet at this time, in what may turn out to be an unsuccessful effort to make up for lost time.
Have a terrific day investing.
Bernie Kaplan, Editor
The Sector Fund Strategist
Copyright 1998
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