If there is one thing that history teaches us (other than that we don’t learn from history) it is that following a drop as severe and rapid as this in the stock market and commodity prices, there will be some incredible opportunities once things start to recover. The energy sector has been one of the hardest-hit areas of the stock market, so it is likely that some of the biggest opportunities will be there. That doesn’t mean, however, that investors should look to rush in and buy energy stocks indiscriminately.
I know that after a strong three-day rally FOMO will be running high, but patience and selectivity are essential at times like these, and right now is not a good time to buy.
For one thing, crude looks to be revving up for another test of the double low just above $20 that formed over the last couple of weeks. That may or may not hold but buying energy stocks just before we find out that important piece of information makes no sense at all. If it does hold, there will still be plenty of upside left after that is known, if it doesn’t there will be much better entry points before long.
In addition, if we look at the S&P 500 from an Elliott Wave perspective, things there look pretty bad right now.
The pattern so far has a classic Elliott look. A first wave was followed by a fifty percent retracement, then a bigger wave, also followed by a fifty percent retracement. In theory, that means that the fifth wave, the…
If there is one thing that history teaches us (other than that we don’t learn from history) it is that following a drop as severe and rapid as this in the stock market and commodity prices, there will be some incredible opportunities once things start to recover. The energy sector has been one of the hardest-hit areas of the stock market, so it is likely that some of the biggest opportunities will be there. That doesn’t mean, however, that investors should look to rush in and buy energy stocks indiscriminately.
I know that after a strong three-day rally FOMO will be running high, but patience and selectivity are essential at times like these, and right now is not a good time to buy.
For one thing, crude looks to be revving up for another test of the double low just above $20 that formed over the last couple of weeks. That may or may not hold but buying energy stocks just before we find out that important piece of information makes no sense at all. If it does hold, there will still be plenty of upside left after that is known, if it doesn’t there will be much better entry points before long.
In addition, if we look at the S&P 500 from an Elliott Wave perspective, things there look pretty bad right now.
The pattern so far has a classic Elliott look. A first wave was followed by a fifty percent retracement, then a bigger wave, also followed by a fifty percent retracement. In theory, that means that the fifth wave, the small blue line on the end, will take us to well below the previous lows.
Again, in a market this volatile and news-driven there is absolutely no certainty that that, or anything else for that matter, will happen, but the possibility just makes this a bad time to buy. If stocks get back to the lows and even just pause, or if crude does the same at around $20, then a partial deployment of any available cash would make sense.
Even then, though, I would only look at companies with solid balance sheets where there is a solid, long-term rationale for owning the stock.
Last week, for example, I recommended taking advantage of the massive yield on offer by buying Royal Dutch Shell (RDS.A). If you did so, you saw a three-day gain in the stock, or more accurately the ADR in this case, of around forty percent.
If you are of a trader’s mindset and couldn’t resist taking a profit at or close to those levels then great, but the trade was intended to take advantage of the yield available. At the time, I made the point that the yield would be attractive even if Shell cut their dividend by an unprecedented amount, but over the weekend, they announced a plan designed to maintain it at current levels.
Let’s face it, the timing of that announcement relative to my recommendation is more about luck than anything, but the long-term reason to own the stock would have remained, with or without the pop earlier this week. With the Fed and other central banks cutting rates drastically, yield is going to be in short supply for some time so the downside of a trade like that is limited.
That formula, looking for companies that have minimal existential threat and whose stock has a good risk/reward ratio and buying when there are signs of a bounce, or at least a halt in declines, is still what investors should be doing. On that basis, while there will be plenty of opportunity before too long, now is a time to hold off, consider what to buy when the time comes, and see what develops.
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