By: Chris Rowe — October 27, 2006
Why the Oil Boom is Just Beginning
I hope that you listened to what I said in my March 23rd article on crude oil.
We've seen significant strength come into energy stocks, mainly due to the increased price of light sweet crude.
There are two very important technical signals that you want to act on to avoid being left in the dust, reading about the money that everyone else is making.
The first is the signal that I highlighted in March: The price turnaround coming off of a major (short-term) bottom, when the weekly momentum turns back to positive.
Six Month Daily Chart:
The second signal is a major breakout of a technical pattern.
It would be big if Crude broke a "double top" - meaning that Crude hit a new high, pulled back (on a healthy correction), and then broke that most recent high.
It would be HUGE if Crude broke a "triple top" - which is the pattern shown below. It's TREMENDOUS when a triple top is broken … when the breakout marks a new all time high!
Two Year Weekly Chart:
In the March 23rd issue of The Tycoon Report, I could only tell you about the turnaround, and that you should look for some good energy stocks to invest in.
If you didn't get into any of the oil stocks that recently broke out, I have 2 pieces of great news for you:
1) The run isn't over yet!
If you aren't invested in energy at all, then you should consider taking the first half of your position at this level. If Crude oil pulls back to the $63.00 range, buy the second half of the position. (I'm talking about taking positions in either Crude Oil itself, OR your favorite oil stocks.)
What if you don't have any favorite energy companies? What if your broker doesn't know how to play energy?
2) Today, I can give you a way to directly invest in Crude oil … without actually trading commodity futures.
Have you heard? On Monday morning, the United States Oil Fund (USO) began trading at an opening price of $68.25 on the American Stock Exchange.
The stated objective of the fund is to track the spot price of West Texas Intermediate light, sweet, crude, and the fund will invest in oil futures contracts traded on the New York Mercantile Exchange, or other U.S. and foreign exchanges if necessary.
That's right … I said a "fund." Keep in mind, however, this is not a mutual fund.
This is an ETF that has better tax benefits, lower fees, and many other positives when compared to mutual funds (above and beyond the fact that about 85% of mutual funds under-perform the market).
What is an ETF, and why should you care?
You should care because studies have proven that simply being invested in the top performing sectors will BY FAR outperform any other type of investment strategy (whether it be buy and hold, perfect market timing, or what have you), while offering the lowest amount of risk.
It doesn't take a rocket scientist - or even a middle school substitute science teacher on the first day on the job - to figure out that oil is definitely one place where you need to have exposure.
This isn't only to make a killing in the market, but at this point, it's a hedge against all other costs of living.
You want to have exposure to the industries that will show the best performance over the long term.
Exchange traded funds (ETFs) are index funds or trusts that are listed on an exchange and can be traded intraday (meaning you don't have to wait for the end of the day, month, or quarter).
With the ETF, you can basically buy crude at 10:00 am, and sell it at 2:30 pm.
Investors can buy or sell shares in the collective performance of an entire stock or bond portfolio - or in this case, a commodity as a single security.
In this case, The United States Oil Fund (USO) ETF tracks the price of West Texas Intermediate light, sweet, crude. But in many cases, an ETF is a basket of stocks in a particular group.
For instance, the top ten holdings of the Select Sector SPDR-Energy (XLE) ETF as of 12/30/05 are:
- EXXON MOBIL CORP 16.16%
- CHEVRON CORP 12.02%
- CONOCOPHILLIPS 8.07%
- BURLINGTON RES INC 4.48%
- HALLIBURTON CO 4.27%
- OCCIDENTAL PETE CORP 3.95%
- SCHLUMBERGER LTD 3.91%
- DEVON ENERGY CORPORATION NEW 3.72%
- EOG RESOURCES INC 3.61%
- TRANSOCEAN INC 3.53%
This accounts for a total of 63.72% of the ETF.
The holdings are rebalanced each quarter, so if you own an ETF currently, you should check the holdings of the ETF since we have started a new quarter and it's important to know what you own.
ETFs, like index funds in general, tend to offer greater tax benefits because they generate fewer capital gains due to low turnover of the securities that comprise the portfolio.
Generally, an ETF only sells securities to reflect changes in its underlying index. Exchange trading of ETFs further enhances their tax efficiency.
Investors who want to liquidate shares in an ETF simply sell them to other investors through exchange trading. Because of this unique structure, ETFs are not required to sell securities to meet investor cash redemptions, potentially generating capital gains tax liability for remaining investors.
Keep in mind that the sale of an ETF will generate capital gains/losses for the investor who is liquidating shares.
Expenses can have a significant impact on returns for investors.
ETFs, in general, have significantly lower annual expense ratios than other investment products. ETFs are less likely to experience high management fees because they are index-based, not "actively" managed.
And, since they trade on an exchange, ETFs are insulated from the costs of having to buy and sell securities to accommodate shareholder purchases and redemptions.
The moral of the story is that you need to get in the game if you aren't in already.
I'll repeat what I said on March 23rd: This is not the Technology stock market of 2000.
This isn't the Real Estate market of today, where you are kicking yourself for not buying 10 years ago.
Commodity bull markets, on average, last 15 years. And this market really just started moving within the last 5 years.
Ride The Trend!