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Sell Oil Stocks Now

By Jeff Clark
Tuesday, November 1, 2011

If you're thinking about buying oil stocks in anticipation of a year-end rally, you may want to think again.
Like most of the rest of the stock market, the oil sector was up big in October. The AMEX Oil Index (XOI) is up 24% since it bottomed on October 2. Many analysts think there are further gains ahead for oil stocks... and that they'll lead the market higher into the end of the year.
Those analysts are wrong.
This is not a time to be buying oil stocks. That time was three weeks ago, when we warned you stocks were bottoming. That time was also back in August, when we said the oil sector looked ripe for a rally.
Now is the time to be selling the oil sector.
It is true that there are some compelling valuations in the oil patch. Oil companies make gobs of money and consistently profit, even during tough economic times. But the sector is too extended to the upside right now to offer a good, low-risk purchase price.
Take a look at this chart of the energy sector bullish percent index (BPENER)...
Remember... a bullish percent index measures the percentage of stocks in a sector that are trading with bullish technical patterns. It's designed to measure overbought and oversold conditions. 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.
The blue arrows on the chart point to times when the BPENER was oversold, and when the smart trade was to buy oil stocks. The red arrows point to overbought conditions.
Here's how those arrows coincide with the action of the AMEX Oil Index...
Right now, BPENER is overbought – which makes this a dangerous time to own oil stocks. Even if you think stocks are headed higher through the end of the year, you're unlikely to profit from buying into the oil sector.
In fact... if you're an aggressive trader, now is the time to be looking for short-selling opportunities in the oil patch.
Best regards and good trading,
Jeff Clark

Further Reading:

Oil may be out, but Frank Curzio has another way to play the energy sector. These companies were clobbered in the selloff this summer... and many are still trading at 30% discounts to their highs.
On October 20, Jeff claimed this is the best opportunity he's seen in two years to "buy low" in gold stocks. He was right. If you bought into the sector then, you'd be up double digits in just over a week.

In The Daily Crux
Market Notes
Stocks and commodities are still moving together... oil, silver, copper, and small-cap stocks are up about 15% in the past month.
"Trophy" resource names are surging... Freeport McMoRan, Peabody Energy, Rio Tinto, and Suncor soar 30%-plus in a month.
Mobile phone plays Apple and China Unicom are among the few stocks up 25% or more in 2011.
Consumers are still spending on sporting goods... Nike and Under Armour break out to fresh all-time highs.
Market Watch
Symbol Price
S&P 500 1253.30 -2.5% +5.9%
Oil (USO) 35.74 -0.8% +1.6%
Gold (GLD) 167.34 -1.3% +26.2%
Silver (SLV) 33.44 -2.4% +38.4%
U.S. Dollar 75.08 +0.2% -2.9%
Euro 1.39 -2.1% -0.7%
Volatility (^VIX) 29.96 +22.1% +41.3%
Gold Stocks (^HUI) 566.09 -2.9% +8.4%
10-Year Yield 2.17 -6.1% -16.9%

World ETFs
Symbol Price
USA (SPY) 125.50 -2.4% +8.0%
S. Korea (EWY) 55.40 -3.6% +2.7%
Canada (EWC) 28.24 -2.6% -0.7%
S. Africa (EZA) 63.40 -5.0% -3.2%
Japan (EWJ) 9.40 -5.8% -4.7%
Taiwan (EWT) 12.95 -2.6% -5.0%
Singapore (EWS) 12.25 -4.2% -6.8%
Israel (ISL) 14.90 -3.9% -9.0%
Lat.America (ILF) 45.49 -3.3% -10.8%
Russia (TRF) 16.50 -3.2% -17.0%
China (FXI) 36.06 -4.6% -18.2%
India (IFN) 24.89 -3.4% -24.9%

Sector ETFs
Symbol Price
Retail (PMR) 21.50 -1.7% +22.0%
Utilities (XLU) 34.85 -0.5% +14.6%
Big Tech (QQQQ) 57.95 -1.7% +11.9%
Internet (HHH) 77.48 -2.7% +11.5%
Consumer Svcs (IYC) 70.56 -1.6% +11.1%
Oil Service (OIH) 128.89 -4.4% +9.5%
Health Care (IYH) 69.10 -1.8% +9.2%
Big Pharma (PPH) 68.13 -2.0% +8.8%
Real Estate (IYR) 57.24 -1.3% +8.3%
Industrials (IYJ) 62.93 -2.7% +7.0%
Software (PSJ) 24.88 -1.6% +4.5%
Transportation (IYT) 87.53 -2.3% +3.6%
Construction (PKB) 11.77 -1.0% +3.5%
Media (PBS) 13.30 -1.7% +2.8%
Defense (PPA) 18.13 -1.7% +2.0%
Biotech (PBE) 20.32 -1.9% +1.7%
Semis (PSI) 14.55 -2.2% +0.5%
Basic Mat (IYM) 67.39 -4.6% -0.2%
Water (PHO) 17.11 -3.3% -0.6%
Insurance (PIC) 15.24 -1.8% -0.9%
Telecom (IYZ) 21.16 -2.0% -1.2%
Financials (IYF) 50.16 -3.3% -4.0%
Nanotech (PXN) 6.40 -2.9% -31.2%
Alt. Energy (PBW) 6.03 -5.2% -38.9%

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