The Best Sector to Buy Today... Maybe
By Jeff Clark
July 29, 2008

By the time you read this, we'll know if it's safe to dive into the refining pool.

Refining stocks have had a terrible year. Valero Energy (VLO) and Sunoco (SUN) are both down more than 50% from their highs of last summer. Tesoro Petroleum (TSO) shares have dropped 75%. And Western Refining (WNR) is down a whopping 80%.

But the end of the decline may be near.

Of course, I'm hesitant to sound the "all clear" horn. After all, these stocks have more false bottoms than a magician's suitcase. Take a look at Valero's chart, for example...

The blue arrows point to temporary lows in the stock that were all followed by more selling pressure. I don't know for sure if Friday's new low for VLO will turn out to be the final bottom, or if it will be followed by another cliff dive. But today's action should give us a strong clue.

You see, Valero reports earnings before the market opens today. Analysts are expecting earnings of $1.33 per share for the most recent quarter. And by the look of the chart, investors are expecting something less. But it really doesn't matter what the company says.

All that's important is how investors react to the news.

A good reaction to good news or a bad reaction to bad news doesn't necessarily mean anything. That's expected. We'll get a better glimpse of the future if we get a contradictory move...

For example, if the company meets or beats expectations and the stock falls, then there's more downside to come.

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On the other hand, if Valero reports earnings below expectations and the stock rallies on the news, then it's a green light to buy into the refining sector.

A rally in the face of bad news is a sure sign a stock is sold out. Investors who were looking to unload the stock have already done so, and there aren't any sellers left. A small amount of buying interest can push the shares higher.

So if you're looking to buy into refining, hope for bad news out of Valero this morning.

And then look for a good reaction in the stock.

Best regards and good trading,

Jeff Clark