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The Best Time to Buy Oil Stocks This Year

By Jeff Clark
Tuesday, May 24, 2011

A lot can change in three weeks.
Consider the change in oil stocks. They've gone from some of the most overbought stocks in the market, to some of the most oversold. Look at this updated chart of the AMEX Oil Index (XOI)...
I first showed you this chart three weeks ago when I cautioned against buying oil stocks. The index is down about 10% since then. There's still some room left on the downside. In fact, oil stocks could easily drop another 5%-10% from here.
But we're getting close to the best buying opportunity in a year for the oil sector.
Consider this chart of the oil sector bullish percent index (BPENER)...
A bullish percent index (or BPI) is a measure of overbought and oversold conditions for a sector. Most sectors are overbought when their BPI rallies above 80. They're extremely oversold when the BPI drops below 30.
The last time the BPENER dropped into "extremely oversold" territory was last June – following the flash crash and the oil spill disaster in the Gulf of Mexico. Anyone brave enough to dive into oil stocks back then enjoyed a 50% gain in the sector in less than a year.
We're now approaching a similar opportunity.
The BPENER is currently just above 40. That means the sector isn't oversold yet, and there's good reason to expect a bit more downside. But while the situation may look bad to an unseasoned investor, now is the time to start putting together a shopping list of oil stocks. The sector should drop to oversold levels in the next few weeks.
When that happens, you'll want to jump in and buy.
It will be your best chance to buy oil stocks this year. Keep your eyes peeled.
Best regards and good trading,
Jeff Clark

Further Reading:

Oil is the quintessential cyclical market. It booms… It busts. And in April 2009, we saw a similar situation to the one we're in now. Oil prices were depressed, and earnings had fallen off a cliff. But Matt Badiali was telling DailyWealth readers to buy...
"I know investing in oil services sounds crazy right now… It's a hard trade to make. But in a boom and bust sector like this, the 'hard trades' are the ones that make you rich."

In The Daily Crux
Market Notes
U.S. dollar index hits seven-week high... Euro touches record low vs. Swiss franc.
Natural gas prices up 2% over the past two weeks… Oil falls more than 6%.
Fear index "VIX" jumps to two-month high.
Tech's "fallen angels" Cisco and Hewlett-Packard hit fresh 52-week lows.
Market Watch
Symbol Price
S&P 500 1317.37 -1.2% +21.1%
Oil (USO) 38.47 -2.5% +19.2%
Gold (GLD) 147.83 +0.2% +28.3%
Silver (SLV) 34.27 +0.3% +98.2%
U.S. Dollar 75.65 +0.8% -11.4%
Euro 1.40 -0.7% +11.8%
Volatility (^VIX) 18.27 +4.8% -54.4%
Gold Stocks (^HUI) 525.10 -0.9% +21.6%
10-Year Yield 3.13 -0.6% -2.2%

World ETFs
Symbol Price
S. Korea (EWY) 61.90 -3.7% +40.8%
Taiwan (EWT) 15.10 -1.6% +35.4%
S. Africa (EZA) 67.91 -3.1% +31.7%
Singapore (EWS) 13.73 -2.2% +28.3%
Russia (TRF) 20.78 -2.5% +27.2%
Israel (ISL) 16.92 -2.1% +26.6%
Canada (EWC) 31.76 -1.8% +25.0%
USA (SPY) 132.06 -1.2% +23.4%
Lat.America (ILF) 50.20 -1.2% +23.4%
China (FXI) 42.94 -2.5% +14.1%
India (IFN) 28.69 -1.7% +11.9%
Japan (EWJ) 9.86 -1.5% +1.8%

Sector ETFs
Symbol Price
Oil Service (OIH) 146.03 -2.0% +42.8%
Internet (HHH) 75.53 -1.8% +40.9%
Basic Mat (IYM) 77.09 -1.4% +38.1%
Semis (PSI) 17.58 -1.9% +37.2%
Telecom (IYZ) 24.92 -0.8% +34.0%
Transportation (IYT) 97.76 -1.2% +29.2%
Industrials (IYJ) 69.53 -1.6% +28.6%
Real Estate (IYR) 60.39 -1.1% +28.5%
Biotech (PBE) 22.85 -1.6% +28.1%
Big Tech (QQQQ) 56.92 -1.5% +27.9%
Health Care (IYH) 74.25 -1.0% +27.1%
Consumer Svcs (IYC) 72.98 -0.8% +26.2%
Big Pharma (PPH) 71.18 -0.5% +25.5%
Retail (PMR) 21.27 -0.4% +24.5%
Media (PBS) 15.11 -1.6% +24.1%
Utilities (XLU) 33.73 -1.2% +23.0%
Software (PSJ) 26.15 -2.1% +22.9%
Insurance (PIC) 16.94 +0.0% +21.7%
Water (PHO) 19.25 -1.8% +19.8%
Defense (PPA) 19.96 -1.6% +15.8%
Construction (PKB) 13.32 -1.8% +13.6%
Financials (IYF) 56.73 -1.3% +8.4%
Alt. Energy (PBW) 9.16 -2.6% +6.0%
Nanotech (PXN) 8.88 -2.3% -2.5%

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