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How Long Will the Energy Stock Pullback Last?
By Michael J. DesLauriers
17 Aug 2005 at 06:23 PM EDT
TORONTO (ResourceInvestor.com) -- Over the last few months Resource Investor has written extensively on the subject of oil. Peak oil, energy stocks, the oil sands, the energy bill, natural gas prices...the list goes on. In terms of equities, the proportion of bulls to bears has shifted significantly, and things seem to have come to a head over the last week or so. After all, most investors are well aware of what happens when everyone is on the same side of the trade - who’s the greater fool? When the media starts comparing the moves in, for example, oil sands stocks to the tech bubble, something must be truly wrong.
For starters, oil sands stocks, for the most part, have solid fundamentals and, if already in production, are throwing off cash like crazy. These are real companies. But people are usually afraid of what they don’t understand, and many fund managers have no conception of valuation other than the never ending red-ink in the tech game. The truth is that while oil stocks may have been ahead of themselves in the short run, the move is only just getting underway. Although the pullback may still have a ways to go in order to bleed out the excesses of the year and re-balance profits and losses more appropriately, the smart money will be waiting for the next inevitable leg.
From its recent peak of 312.80 on 11 August, the TSX Energy Index is only down around 7% to 291.37 at today’s clos-e. It is important to note that the index started off 2005 all the way back at 200 and was 172, just 12 months ago - a very impressive move of over 80%!
Is the run over? Despite what some commentators might be saying on CNBC, the answer is clearly, no. After a move of that magnitude it would actually be unhealthy not to pullback and odds are this correction still has a ways to go, especially if oil prices correct as well. That said, long-term holders now in a loss situation don’t really have any reason for concern, although taking a loss and buying back a little lower in the coming weeks could well turn out to be a profitable course of action.
As Resource Investor readers may have noticed in today’s blog, George Soros “unloaded energy stocks in the quarter ended June 30.” Well, the famed Mr. Soros certainly left something on the table by getting out that early, but rest assured, he’ll be back. Today’s $3 drop in oil prices probably shook out a few additional weak, frightened hands, but oil would have to drop quite a bit more than that to derail this bull market. Despite rising inventories of crude, we’re still above $60 and nothing has really changed fundamentally.
The bottom line for investors in energy related stocks is that short-term corrections should be expected and even embraced as buying opportunities. That said, one must always seek the best entry or re-entry price possible and there is no sense in trying to catch a falling knife. When everyone starts saying that the oil-bubble has burst and the key indices have had a meaningful pullback relative to its massive run, it will be time to get back in. As a reasonable comparison, many of the big base metal stocks went through a similar purge back in April and May, only to march back to new highs. The comparison is valid because these stories also have great fundamentals and are making tonnes of money due to high commodity prices.
As Jesse Livermore once said, “Be right and sit tight.”
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ANMERKUNG von Edel Man: Das Livermore-Zitat hat der Autor reingestellt!
Grüsse