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.[ad#Google Adsense 336×280-IA]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[ad#jack p.s.]
Source: The Growth Stock Wire