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<\/p>\n“I love the oil stocks,” a financial television talking head proclaimed yesterday… “With all the unrest in the Middle East the price of crude oil is headed higher. And, with oil above $80 per barrel, the oil companies are printing money.”<\/p>\n
Maybe so. At this point, though, it seems a little late in the game to be buying the oil stocks. After all, the energy sector is up 15% so far in 2024. It’s up 30% from this time last year.<\/p>\n
Of course, that doesn’t mean that oil stocks can’t go even higher. They certainly can. But, the risk of buying them now, after such a large rally, is quite high. And, the potential reward may not be enough to compensate for that risk…<\/p>\n
Besides, if history is any sort of a guide, patient investors will get a much better buying opportunity a few months from now.<\/p>\n
Let me explain…<\/p>\n
One of the best timing tools for getting in or out of the oil sector is the Energy Sector Bullish Percent Index (BPENER). This is a momentum-based indicator that lets us know when the sector is overbought and ripe for a correction, or oversold and a good time to buy.<\/p>\n
Take a look at this chart of the BPENER…<\/p>\n
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A bullish percent index (BPI) measures the percentage of stocks in a sector that are trading with bullish technical patterns. It’s designed to measure overbought and oversold conditions.<\/p>\n
An index is overbought when it registers above 80 – meaning 80% of the stocks in the sector are trading with bullish patterns. An index is oversold when it drops below 30.<\/p>\n
The blue arrows on the chart point to when the BPENER rallied above 80 and then turned lower from overbought conditions. That action generates a BPENER sell signal. Usually, it’s a good idea to avoid owning energy stocks in this situation.<\/p>\n
We’ve had three BPENER sell signals over the past two years. Here’s how those signals coincide with the action in the Energy Select Sector Fund (XLE)…<\/p>\n
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In each case, XLE trended lower in the weeks immediately following a BPENER sell signal.<\/p>\n
The signals don’t necessarily justify taking a short trade and betting against the energy sector. But, they always provide a much better buying opportunity a few weeks after the signal.<\/p>\n
The BPENER closed at 91 last Thursday – meaning 91% of the stocks in the energy sector are trading with bullish technical patterns.<\/p>\n
It doesn’t get much better than that.<\/p>\n
If it can’t get much better, then it can get worse. And, as soon as it gets worse, the BPENER will generate a sell signal.<\/p>\n
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