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Tuesday, August 16, 2022

The Lonely Bull Amid This Brutal Bear

I don’t think any of us needed the bear market to become “official,” but that’s what everybody seems to be talking about today. 

The S&P 500 closed 20% off its recent high yesterday, and while it has been there before during the trading day, this checks the remaining “requirement” that some investors have. 

I don’t think we needed the validation. We all knew it was a bear market anyway, long before any official criteria were met. 

But… 

You’ve heard the old saying that there’s always a bull market somewhere, right? 

It’s true, even right now… 

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Investors Are Reluctant to Like this Bull 

I can summarize this crazy market in four words… 

Oil up. Stocks down. 

That’s not the market summary that thrills very many investors. But this exact summary has become a recurring storyline in 2022. This sort of stock market action reminds us that successful investing is never about what you wish would happen; it is only about what is happening. 

When I first began recommending oil stocks in the pages of Investment Reportlast December, I did not do so because I wished that oil prices would soar over the ensuing months; I did so only because I thought they would. 

That’s why I recommended buying the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). 

I stated in that original recommendation…. 

A tightening oil market, coupled with a rising inflationary trend, provides ample reason to expect oil stocks to deliver market-beating results in 2022. If oil prices continue trending toward $100 a barrel or higher next year, I would expect this ETF to sail through $150 and then make a run for its 2018 high around $180. 

As we now know, oil prices not only soared “toward $100 a barrel,” but they also soared through that level to hit a 2022 high of $130 a barrel. Accordingly, XOP did indeed “sail through $150” and also sailed through $170 earlier this week. 

Crude oil, the enfant terrible of the financial markets, was certainly not a popular investment late last year. 

In fact, as my Investment Report readers may recall, I actually apologized for the initial XOP recommendation by saying, “I understand that many investors may have little interest in buying an energy stock. I get it. I don’t have much interest in recommending an energy stock. But the near-term bullish backdrop has become too compelling to ignore.” 

That was just the beginning, Since then, I’ve added six more energy stocks. Those seven recommendations have produced average gains of more than 24%… even though the S&P 500 Index delivered a loss over every corresponding measurement period. 

In other words, energy stocks are delivering gains when almost nothing else is. This energy bull market is what is happening right now, even if almost no one is wishing for it. 

And as I have emphasized to my readers, I expect the energy sector to produce even greater gains over the next several months. Oil and gas booms rarely flame out quickly. Sure, they will suffer periodic setbacks along the way – like the last few days – but they usually last a while. 

The current boom is even less likely than its predecessors to flame out quickly. That’s because eight long years of declining investment in global oil exploration and development will stunt production growth for several years to come, no matter how much money oil companies might start throwing at new exploration projects. 

Additionally, the unexpected supply shock from “lost” Russian oil exports will take a big bite out of the global crude supplies that do exist. 

Bloomberg New Energy Finance (BNEF) reported earlier this week that global crude stockpiles have tumbled to a new low relative to their average seasonal pre-COVID levels. 

Meanwhile, global oil and gas demand, which has trended sharply higher for two years, could surge anew as the Chinese economy reopens from the recent COVID lockdowns and as global jet fuel demand continues recovering. 

Add it all up, and you’ve got a formula for explosive oil and gas prices. 

And yet, most investors still show little desire to buy oil stocks. Even those who express mild interest often say to me something like, “But haven’t oil stocks had a big move already. Do you really think they can move even higher?” 

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More to Come 

I have no crystal ball, of course, nor do I have an advance copy of the Dec. 31, 2022 Wall Street Journal, but yes, I really do think oil stocks can move even higher. 

Many of us have become so accustomed to excluding oil stocks from investment consideration that we turn a blind eye to their successes, even when they are significantly outperforming every other major stock market sector. 

As the chart below shows, the S&P Energy Sub-Sector has soared a spectacular 68% year-to-date – far outpacing the other 10 sub-sectors of the S&P 500 Index. 

Nine of those 10 have produced a minus sign year-to-date. 

Clearly, oil and gas stocks deserve a lot more love from investors. 

As a group, energy companies are minting money – and doing so when many other companies are struggling to produce growth of any kind. 

The red-hot energy sector will probably become even hotter in the months ahead. It may be ho-hum or even flat-out boring to many, but I’ve found profits – potentially big profits – to be more-than acceptable antidote to boredom. 

Regards,  

Eric 

Eric Fry is an award-winning stock picker with numerous “10-bagger” calls — in good markets AND bad. How? By finding potent global megatrends… before they take off. In fact, Eric has recommended 41 different 1,000%+ stock market winners in his career. Plus, he beat 650 of the world’s most famous investors (including Bill Ackman and David Einhorn) in a contest. And today he’s revealing his next potential 1,000% winner for free, right here.

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