The market doesn’t like slumping stocks.
Shares that fall become unpopular with the investors that bailed at a loss and holders hoping for the day when the price will return to the level they bought in at, so they can sell without taking a hit. Investors and traders are normally sore losers so once a stock or commodity has hurt enough players the reputation can keep them cheap.
The industry doesn’t like fallers either, because it is easier to sell winners than losers and the ‘sell side’ is at least half the picture on Wall Street.
However a large slice of the profits from equities of for that matter any investment comes from buying cheap and selling expensive. Buy low, sell high.
The trick is to spot low.
There is a massive low on the horizon and all investors should watch out for it.
That opportunity is the coming low in oil. That point might not be next week but it is getting closer by the day.
Unless some new technology takes hydro-carbons out of the picture as dirt cheap energy, oil is always going to be a massively important commodity. There are roughly 7 barrels in a ton, so as of today oil is about $330 a ton. That’s about as cheap as commodities get, equivalent to sugar.
Energy is life, which makes oil a proxy for the global population itself, but unlike sugar there isn’t any more being made.
Oil has plummeted and right now is in another slump.
My recent article predicting a major move in oil has come to pass and this slump will see oil at levels which will be lows.
We are in the crash phase of oil but oil will recover, its simply when rather than if.
Timing the market is very difficult but oil will not go to zero, it simply costs too much to fund. Low prices must be temporary unless cheaper alternatives are found and as yet they haven’t.
The bottom of the oil slump will be a tremendous place to enter the market to load up on oil companies.
Firms like Chevron, Exxon, Statoil, Shell and BP are pillars of the world economy and investors will get an opportunity to buy them up at rock bottom prices.
It is not the gamblers way to buy oil stocks at the low of oil, but those who want to trade oil always have plenty of opportunity to trade volatility. For investors the big opportunities come now and again.
Its far better to buy oil stocks paying mighty dividends that play Russian roulette with oil itself, because buying big producing oil companies when they are down on their luck is a historic opportunities to lock in fat dividend yields later and solid capital gains.
An investor will be spoiled for choice and would already think they were when hunting for oil stocks that already look cheap.
However cheap can and likely will get cheaper
Don’t catch a falling knife is basic investing law and while it is probably only marginally true, safe is better than sorry. The way to catch falling knifes properly is to let them stick in the floor first. V shape bottoms on charts are quite rare and unless something massive happens like a war, oil is not going to whip around and shoot up. Instead chances are it will languish for months perhaps years. Once the initial drop has turned into lethargy, that will be the time to buy.
It’s always a risk to be too early but it’s better to be in a little early and have to wait, than miss a recovery by taking your eye off the ball.
This is the set up.
(Chart)
Once oil settles it will be a good time to start slipping into oil stocks. Like supertankers the situation will not reverse overnight, but there is never a wrong time to buy cheap shares or a wrong to time sell expensive ones, so as long as you don’t go too aggressively a steady buyer will be a good low average.
Unless the world falls into some kind of new depression, low oil prices will spur a new boom and with that boom demand for oil will soar and when it does so will the price of oil. Does anyone disagree?
When and if, are the too key questions in investing and when the ‘if’ is removed the investor is on solid ground.
While it is hard to time the market, the investor in cheap oil stocks will be able to console themselves with solid dividends. It is not so bad to get paid to wait for the inevitable.