Friday, July 8, 2016

Don’t Buy the Energy Sector Hype

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ECONOMY & MARKETS | July 08, 2016

Energy Sector's Cycle About to Turn (Lower)

By Adam O'Dell, CMT, Chief Investment Strategist, Dent Research

To Everything (Turn, Turn, Turn)… There is a Season (Turn, Turn, Turn)
~ The Byrds

EditorHi Subscriber,

Energy stocks have been on a tear recently.

The SPDR Energy Sector ETF (NYSE: XLE) gained a whopping 34% in less than five months, between January 20 and June 8, 2016.

This move easily caught the attention of the financial media. And since energy stocks came into 2016 already 40% off their 2014 highs, the early-year rally led many analysts to conclude that "the bottom is in" for energy stocks.

I think they're wrong.

I think energy stocks are headed lower from here, not higher.

And I'll explain why…

This $25 Trillion Bubble is About to Burst

The investment that triggered the Great Depression is at it again. And unfortunately, it's sitting in the portfolios of 81% of retirees over 65. It's not stocks or bonds, but they will both crash when its bubble bursts. Here's proof…

You see, there's a seasonal pattern to financial markets.

Stocks typically make most of their gains between November and April. Then they produce lackluster returns (with more volatility) between May and October.

The seasonal pattern doesn't play out exactly like this each and every year. But when you look at decades' worth of data… that's the seasonal tendency you'll find.

Energy stocks are also influenced by seasonal factors. Oil refineries typically do routine maintenance during the first quarter of the year. During the second quarter, refineries switch from producing winter-blend fuel to summer-blend. What's more, demand for various petroleum products goes through seasonal cycles, as the weather changes.

All told, seasonal influences affecting the energy supply chain create a rather predictable pattern for energy stocks. They're typically strongest between late-February and early-May. Then they're weakest between mid-May and late-September.

Take a look for yourself…

This chart shows the average monthly return of the SPDR Energy Sector ETF (NYSE: XLE) for each calendar month of the year:

See larger image

As you can see, it typically pays to be invested in energy stocks between February and May… then out of energy stocks between May and September.

This seasonal pattern of strength and weakness applies to the energy sector ETF (XLE). But it also applies to a number of related, energy-market ETFs, including, the SPDR Materials Sector ETF (NYSE: XLB), the SPDR Oil & Gas Exploration ETF (NYSE: XOP), the SPDR Oil & Gas Equipment & Services ETF (NYSE: XES), and the price of oil itself, as seen by the United States Oil Fund LP (NYSEArca: USO).

For each of these, the pattern is roughly the same: strength between February and May, then weakness between May and September.

Take a look at the average monthly performance of this "Energy Portfolio," which includes equal investments in each of the five ETFs above (XLE, XLB, XOP, XES and USO):

See larger image

The point I'm making is simple: don't buy into the energy rally!

At this point, energy prices are more likely at a peak than a bottom. And if this chart doesn't keep you out of energy-market investments for the next few months, I don't know what will.

Of course, if you're open-minded and willing to bet against energy-related investments… now is a great time to make some bearish bets.

In fact, I've recommended two bearish bets on the energy sector to my Cycle 9 Alert readers. One is a bet against the energy sector, in general. We're positioned for lower prices between now and mid-September.

The other is a specific bet against a foreign energy producer… one that just so happens to be in a world of hurt. It's mired in a political corruption scandal and is facing a multi-billion dollar pension shortfall. Basically, the company is trash… and I estimate its stock price could be cut in half between now and October.

I just recommended this position last week, so there's still time to get in. The specific investment I told Cycle 9 Alert readers about is still within my recommended entry price range… and I estimate this investment could triple your money, at least, if the stock gets knocked lower during the energy sector's seasonal summer slump. Click here to gain access.

Again, regardless of what you do… I suggest not buying into the energy-sector hype.

To good profits,

Adam O'Dell, CMT
Chief Investment Strategist, Dent Research

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