A quick glance at Figure 1 is enough to scare the daylights out of most sane investors.

 

Figure 1 – SPDR Energy (ticker XLE) (Courtesy AIQ TradingExpert)

Thanks primarily to Saudi Arabia’s desire to “boost market share” by putting a lot of oil producers around the globe “out of business”, energy prices – and the prices of most stocks in any field that has anything to do with producing energy – have plummeted since Summer 2014.

Standard investment advice suggests that it is typically a mistake to attempt to “buy the bottom.”  Still there is some evidence that suggests that this may not be the worst time to consider looking at energy related stocks.  In fact to put it more accurately, evidence exists that suggests that now may be the very best time to consider looking at energy related stocks.

The Test

*The test below involves buying Fidelity Select Energy (ticker FSENX) on the last day of January and holding through the first day of May, each year since 1989.

*No stop-loss is involved in this test, simply buy-and-hold for roughly 3 months.

Figure 2 – Growth of $1,000 invested in FSENX from las trading day of January through 1sttrading day of May (1989-2014)

Results

Figure 3 displays the results from each year using the “strategy” (if this can in fact be legitimately called a “strategy” – Q: Is this any way to trade energies?  A: Well, it’s one way…..).

Figure 3 – Annual Results of Holding FSENX during “bullish” period

A few relevant notes:

-# times UP = 22

-#times DOWN = 4

-Annual Average %+(-) = +8.24%

-Worst Year (1997) = -13.47%

Other Choices

FSENX is obviously not the only choice these days.  Other possible candidates:

XLE           SPDR Energy

ERX           Direxion Russell 1000 Energy (x3 leveraged)

ENPIX        Profunds Energy

RYEIX        Rydex Energy

Summary

As a firm believer in the “The Trend is Your Friend” mantra, the prospect of buying energy stocks right here and now appears to be a bit “gutsy”. So the bottom line is this:

Does one put more faith in the belief that the current (down) trend will continue?  Or more faith in the seasonal historical tendency for energy stock to perform well over the next three months?

One can make a compelling argument that the worst is over for energy stocks and that a buying opportunity may be at hand.  Aggressive investors and traders should definitely be taking a look at the potential for energy stocks to bounce higher in the months ahead.  Just as importantly, anyone considering “taking the plunge” in energy stocks should be giving very careful consideration to how much capital they are willing to commit.

As always, I am not making any recommendations here, just telling you what I see.  I don’t think there is anything wrong with considering a position in energy stocks.  I do have a problem with making a huge bet in the face of an ongoing decline.  So just remember:

Jay’s Trading (and Life, for that Matter) Maxim #9:  There is an exceptionally fine line between courage and stupidity.  If you are not sure which side of the line you are on….step lightly.

Jay Kaeppel  
Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiq.com) client
http://jayonthemarkets.com/

Jay has published four books on futures, option and stock trading. He was Head Trader for a CTA from 1995 through 2003. As a computer programmer, he co-developed trading software that was voted “Best Option Trading System” six consecutive years by readers of Technical Analysis of Stocks and Commodities magazine. A featured speaker and instructor at live and on-line trading seminars, he has authored over 30 articles in Technical Analysis of Stocks and Commodities magazine, Active Trader magazine, Futures & Options magazine and on-line at www.Investopedia.com.