By Justin Spittler, editor, Casey Daily Dispatch
Gold couldn’t catch a bid in December 2015.
It was down more than 30%, and trading at the lowest price in nearly six years.
Gold stocks, which are leveraged to the price of gold, were doing even worse. The average gold stock was 80% off its highs.
Most investors wanted nothing to do with gold. But not Doug Casey.
Doug knew gold would rebound. It was only a matter of time. He even told Kitco, one of the world’s biggest gold and silver retailers, on December 18, 2015, that he was buying gold hand over fist:
My opinion is if it’s not the bottom, it’s close enough to the bottom. So, I have to be an aggressive buyer of both gold and silver at this point.
• Doug’s timing was nearly perfect…
The day before, gold bottomed. It went on to gain 30% over the next six months.
The average gold stock more than doubled in value over the same period.
I’m telling this story because an opportunity just like this is shaping up before our eyes. Only this time, it’s in the energy market.
• Energy stocks have been beaten to a pulp…
You can see what I mean below.
It shows how the Energy Select Sector SPDR ETF (XLE) has done since the start of the year. This fund invests in 36 major U.S. energy companies, including Exxon Mobil and Chevron.
You can see that XLE is down 13% this year. That makes energy stocks the worst-performing sector in the S&P 500.
Energy stocks are now off to “one of the worst beginnings to the year ever,” according to Morgan Stanley.
As if that weren’t enough to scare away most investors, look at the ugly chart below.
It compares the performance of XLE with the SPDR S&P 500 ETF (SPY), which tracks the S&P 500.
When the line is rising, energy stocks are doing better than the broad market. When it’s falling, energy stocks are underperforming the S&P 500.
• Energy stocks have been lagging the broad market for nearly a decade…
As a result, energy stocks now make up just 5.9% of the S&P 500. That’s half of what the sector’s weighting was in 2011.
Not only that, the 36 energy stocks that make up XLE are now worth less than the combined value of Apple and Alphabet, the parent company of Google.
• Situations like this don’t last forever…
Eventually, the pendulum swings the other way. The trick is knowing when that will happen.
That’s obviously easier said than done. Plus, you have to understand that markets rarely change direction on a dime. Instead, they usually go through a bottoming process that can take weeks or longer.
And it looks like energy stocks may have begun that process.
• Energy stocks took off last week…
XLE jumped 2.5% on Friday. That was the biggest one-day jump in energy stocks since last November.
This week, XLE is up another 1.4%.
Now, it would be easy to dismiss this as “noise.” But if energy stocks keep rallying, XLE could “break out.”
The chart below shows the performance of XLE over the last 12 months. You can see that it’s been in a downtrend since late 2016.
You can see that XLE hasn’t broken out of its downtrend yet. But it could do that sooner than most investors think…
• Energy companies are starting to make money again…
Revenues for energy companies in the S&P 500 surged 34% during the first quarter of 2017. That was more than quadruple the S&P 500’s 7.6% jump in revenues.
Wall Street now expects U.S. energy companies to post an 18% rise in revenues when the second quarter is all said and done.
Not only that, analysts expect the sector to report a more than 400% spike in second-quarter profits. For perspective, second-quarter profits for the rest of the S&P 500 are expected to rise just 3.7%.
• Once “the market” figures this out, watch out…
Energy stocks are going to skyrocket…just like gold stocks did in early 2016.
Keep in mind, the bottoming process could take weeks or even months.
So, wait for energy stocks to “carve a bottom” before diving in. That’s when stocks stop falling, trade in a tight range for a period of time, and then start heading higher.
Stocks that carve a bottom often keep soaring. Just look at what GDX did after it carved a bottom early last year.
By waiting for energy stocks to carve a bottom, you’ll greatly limit your downside…without giving up a chance at big returns.
I'll let you know when the time is right to invest in the energy sector. In the meantime, keep an eye on XLE and other energy funds like the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).
Once they carve out bottoms, it will be a good time to buy.
Delray Beach, Florida
June 13, 2017
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