By Kris Sayce, editor, Casey Daily Dispatch
It’s almost over.
The worst month of the year for stocks – historically – is September.
So far, it’s living up to its reputation.
For the month (at yesterday’s close), the S&P 500 is down 164.6 points. That’s a drop of 3.6%.
But look on the bright side.
Today was the last trading day of the month.
Now we can move on… to the stock market’s best months.
In which case, if we’re confident that now is a buying opportunity…
What should you buy?
We’ll share our thoughts below…
If this is your first time reading the Dispatch, welcome. If you’ve been here before, welcome back.
At the Dispatch we have two goals:
To introduce you to the most important investing themes of the day, and
To show you how to profit from them.
We do this by showcasing ideas from our in-house investing experts: Dave Forest and Nick Giambruno. And from the founder of our business, Doug Casey.
And right now, the sector that Dave Forest is most excited about is energy. For good reason. The oil price is on the up… and there could be more to come.
Goldman Sachs Is Fully Behind This Trend
As the BBC reported yesterday:
Oil prices climbed above $80 (£59) a barrel on Tuesday, hitting their highest level in three years as the pound slumped.
Brent crude, the international benchmark, rose to as much as $80.69 on the day, the most since October 2018.
Prices have been rising for seven consecutive days on the back of the energy crisis in Europe.
Analysts believe that oil prices will continue to rise amid surging demand and tight supplies.
Investment bank Goldman Sachs said Brent could hit $90 per barrel by the end of the year, warning that rising input costs, higher gas prices and weaker growth were likely to weigh on European corporate profit growth for 2021.
Dave has had a positive view on oil all year. One of the reasons, as we explained last week, is that he sees the anti-fossil fuel pressure groups as causing the price to rise.
Also, in their zeal to push economies away from oil and gas, they may actually cause a new oil and gas boom.
That’s because as supply falls, due to increased regulations, prices will naturally rise. As a result, new and existing oil companies will increase supply and explore for new reserves.
It’s basic supply and demand economics.
But buying directly into oil stocks is only one way to play a surging oil price. During any commodities boom, another profitable way to play it is often by investing in the companies that service the oil industry.
Pictorial Proof of Supply and Demand in Action
One of our favorite charts is the Baker Hughes Rig Count. It records the number of active rigs in specific regions.
But the best way to display this chart is to overlay the oil price. As we mentioned above, this is basic supply and demand economics. And this chart shows that perfectly.
Colleague and investing expert Dave Forest published this chart in his recent issue of Strategic Trader.
The orange line is the oil price (left scale). The blue line shows the number of operational rigs in the U.S (right scale).
You’ll note how the orange oil price line is a perfect leading indicator for the number of active rigs. As the oil price goes up, the rig count follows suit – with a lag.
As the oil price falls, the rig count follows suit – with a lag.
That lag makes perfect sense. Oil companies can’t and won’t “turn on or off” an oil rig at a moment’s notice. Again, supply and demand economics play a part.
In fact, as the oil price begins to fall, the oil companies may even increase production to produce as much as they can before the price falls further… until it becomes uneconomic to do so.
As for “turning on” supply, that takes time. They may need to service the rigs before restarting supply. If the oil price is really running higher, they may need to open new rigs. That takes time, too.
In this case, Dave sees that orange oil price line rising (so does Goldman Sachs). At the same time, Dave sees the gap on the chart between the oil price and rigs closing – as new rigs come online.
As Dave said in his recent Strategic Trader issue, “The higher the price of oil, the more rigs in the field to get that oil.” (Paid-up subscribers can catch up here.)
All up, it’s a great way to play the rising oil price.
Stake Less and Earn More?
That’s why Dave recently recommended two oil services warrants plays.
While it’s a great time to buy oil services stocks, an even better play is to use the warrants. We’ve discussed this idea many times.
But in short, warrants are a great way to get access to big gains, without putting a large amount of money at risk.
For instance, with one of Dave’s new picks, the underlying stock trades for nearly $30. The warrant for the same stock trades for around $2.
Because warrants allow you to benefit from the price action of the underlying stock, it means you can invest a much smaller amount, yet still get the benefit of the stock’s gains.
So rather than investing $1,000 in the stock… hoping for a 20% gain… you could invest, say, $200 in the warrant and potentially snag a 200%, 300%, or 500% gain.
Of course, nothing is certain. There are always risks. But we’ve seen scenarios like this play out in the past.
One of the best plays in Strategic Trader is an example of this. In February 2019, they recommended Blink Charging warrants. In November 2020, Dave recommended selling the warrants for a 2,805% gain.
That’s a great return. As for the underlying stock, it did well, too… but not quite as well. Over the same period, it gained around 630%. That’s nothing to be disappointed about.
But the comparison is clear. Warrants allow you to risk less, but the payoff is a bigger return. That makes them a great way to lower your overall risk in the market, by investing smaller amounts, while still getting exposure to a rising market.
The bottom line is that of any market sector today, Dave believes that some of the best opportunities are within the energy sector. That’s why he’s so excited about oil stocks.
If Dave and Goldman Sachs are right about the direction of the oil price through the rest of this year – and if we’re truly at the end of the worst month for stocks, so the price is poised to rise – it stands to be a bumper opportunity for the energy sector… and those investing in energy stocks.
Editor, Casey Daily Dispatch
P.S. Staying on the theme of oil, we asked technical analyst Imre Gams to check out the oil sector, too. Dave’s beat is mostly in small- and mid-cap companies. But we also wanted to know if there were any large-cap stocks worth looking at from a trading perspective. Imre found one stock well worth considering. Read on for more…
Welcome to Casey Daily Dispatch’s Chart Watch. We’ll look at the best technical opportunities in the market. You’ll see that chart analysis is a very powerful edge that every investor should have in their toolbox.
Our mission is to simplify price charts. We remove all the clutter and the noise, leaving you with a crystal-clear view of the markets.
A Big Play on Big Oil
Imre Gams, technical analyst, Casey Research
In today’s Chart Watch, we’ll turn our attention to the energy sector once again.
My analysis has identified a stock that may have just completed a multi-year corrective decline.
If I’m right, then we are about to see substantial gains as a new bull market emerges.
The stock in question is British Petroleum (BP).
BP is one of the stalwarts of the energy sector, but it hasn’t exactly been at the forefront of investors’ minds for several years.
In fact, BP topped out in October 2007 with a closing high of $77.99. Since then, the stock has been in a bear market.
Let’s take a look at BP’s price chart below so I can show you an important development in the price action…
This chart has two important features to it:
The triangle chart pattern drawn with the blue trend lines.
The Relative Strength Indicator (RSI) at the bottom of the chart.
Let’s start with the triangle. If you’ve read Chart Watch before, you’ll know that a triangle is a significant chart pattern for two reasons…
The first is that once a triangle breaks out, you can expect a swift and sudden move in the direction of that breakout. BP’s triangle broke in March of 2020 and then sold off from $28.97 to a low of $15.48 by October 2020.
This was a 46.5% move!
The second reason that triangles are so important is because they tell us that once this swift and sudden move is over, we can expect to see an even bigger move in the opposite direction.
This is where the RSI comes in. The RSI is a momentum indicator, and you can see quite clearly that BP had its most extreme oversold reading ever when it put in its October low.
The last time BP had an oversold reading that was anywhere this extreme, it was all the way back in 1975 when the stock was trading a little over $2. Although there were some bumps and scrapes along the way, BP would of course eventually trade to its 2007 all-time high of $77.99.
The extreme RSI reading, combined with the triangle chart pattern, is strong evidence to suggest that BP may have already put in what will prove to be a long-term, significant bottom.
I’ll keep a close eye on BP’s price action. If anything changes in the analysis, I’ll be sure to keep you updated.
Until next time,
Technical Analyst, Casey Research