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Is It Time to Buy the Energy Sector?

|Includes: iShares U.S. Energy ETF (IYE)

The media circus over the BP disaster in the Gulf of Mexico has everyone talking about the energy sector. My email box is full of questions pertaining to buying BP or energy stocks. Thus, do we buy the sector or avoid the sector? My answer would yes, it takes a well defined strategy encompassed by discipline, but you can find opportunities in the sector.  

The Dow Jones US Oil & Gas Index found support at the 430 level and bounced back into the previous trading range of 460-530. 480 and the 200 day moving average offer some resistance near term. The key take away is the short term bottom has been established. The index is heavily weighted to the major conglomerates, and based on the bounce, would make the individual stocks worth searching for opportunities short term. The challenge comes in the news surrounding BP. Because of the regulators are involved and government has its hand out, the sector wide impact from everything is uncertain. However, one thing is a given – demand for oil will not go away. In fact, if and when the global economies pick up momentum, demand will rise. Thus, the need for defined strategy and discipline to follow through. IYE is the ETF which mirrors the oil and gas index. Spend some time researching the parts a well as the whole.

Energy commodities are likely to rise in the face of the moratorium placed on drilling for the next six months. The cost to the US will be substantial in production. Exxon and others are already moving drilling rigs to other parts of the world. Lower production equals lower supplies and if demand rises, higher prices. This would make the commodities attractive on a longer term outlook. USL is the average 12 month contract for crude oil. The oil services stocks will rise for the ashes as well. RIG, Transocean is the poster child for the sector as BP is for the energy stocks, but one bad apple doesn’t destroy them all. Looking through the services companies there are attractive valuations worthy of watching and investing in based on a defined strategy.

Coal, natural gas, solar, wind and other alternative energy sources would be the worth watching as well. If the price of crude oil rises back near the $100 level the demand for alternative sources of energy will grow. Solar received upgrades this week from analyst and TAN, Claymore Global Solar Energy ETF, has moved from $6.10 to $7.25 (18.8%) over the last eight trading days. Natural Gas is on the move again based on this same alternative energy rational and the outlook for the sector is growing in favor. A word of warning relative to the alternative energy space, we have seen this talk before and if oil prices don’t remain painfully high the stocks loose their attraction. Don’t blindly put money to work in these sectors without a defined strategy.

Is it time to buy the energy sector? Yes, if you have a defined strategy to approach the opportunities outlined above. What is taking place currently in this sector is a perfect example of how Sector Exchange builds its watch list. Scan the sectors for opportunities we see developing, put the best ideas on a watch list with a defined strategy for investing, and when they met the predefined criteria put them into play. Manage the risk of the money invested each day until the goal is achieved. Simple, yet powerful when followed.

Track the energy sector and all the parts to find the best opportunities and take advantage of what the market gives. Manage the risk associated and remain focused on your goals.

 



Disclosure: none