It’s Time to Buy Oil - Almost
By Jeff Clark
January 17, 2007
I’ll bet Norm would be buying oil stocks today.
In an old Cheers episode, the gang at the Boston bar goes in with Norm on an investment in a chain of tanning salons. It’s the beginning of winter, and Sam, Carla, Cliff, and all are eagerly anticipating windfall profits once the snow begins to fall.
But instead of snow, a heat wave sweeps through Boston.
There are no customers at the tanning salons, and the gang pressures Norm to buy them out of their investment. Norm insists that winter is coming, and if everyone would just hold out a little while longer, the profits will come too. The gang is not persuaded and Norm reluctantly buys back their shares.
And then it starts to snow.
Last week, oil stock investors acted like the gang at Cheers and dumped their shares at fire-sale prices.
This week, the California orange crop froze over. Ice storms swept through Oklahoma and Texas. And a big chill is moving in on the Northeast.
As it turns out, we may actually have a winter this year. So maybe it’s time to take another look at the oil stocks...
We’ve seen quite a slide in the oil patch, and the stocks are trading back down to the lows of last September. That’s when I first suggested it was time to jump into the sector... and it’s just about time to jump in again.
As you can tell from the following chart, the best time to buy oil stocks is when the Energy Sector Bullish Percent Index drops down to between 20 and 30...
A “bullish percent index” (BPI) is a technical indicator that measures the overbought/oversold conditions in a given market. Overbought markets tend to break to the downside, and oversold markets tend to spring upwards. In the case of oil, the BPI is overbought at about 80 and oversold near 30.
Oil stocks are pretty oversold right now, and another few days of downside or sideways action will set up a good, low-risk buying opportunity.
We’re not there yet – but we’re close.
Cheers,
Jeff Clark
