Jim Farrish, founder of Money Strategies, is a leading expert on sector investing; his approach combines technical and fundamental analysis within the framework of investor psychology.
In the latest from his SectorExchange.com, he says, "This week's spotlight is the energy sector with a focus on the current trend, what the outlook is and what strategy to take looking forward." Here's his latest, along with some ETFs to play this trend.
"Over the last six weeks, the financial media has warned that 'consumption will decline as a result of the US recession.' But so far we have not seen any slowdown in consumption and may not based on recent studies.
"In fact, we have seen China and India absorb any lack of consumption by the US. The key here is not so much who is right and who is wrong, but how you manage your own positions within the energy sector.
"Since July the sector has essentially trended sideways looking for the next catalyst to push the sector higher. So far that catalyst has not materialized and in fact the opposite opinions have developed; a correction in the energy sector as a result of higher supply and lower demand.
"This is a tricky sector to make simple assumptions due to outside variables that are truly unpredictable. Those would be political, such as we are seeing in Venezuela and Iran. They would be supply driven by OPEC, which just announced they want to cut production due the 'slowing' in the US and Europe.
"They would be subject to growth in developing countries such as China and India. The point here is simple; making assumptions in this sector can be dangerous to your portfolio. The key is to let the data speak for itself and have a definitive strategy in approaching your investments for this sector.
"Short term consumption in the US and Europe have dropped. But, only in the last two weeks has supply data shown an increase versus a decrease. It is also important to realize we are heading towards the peak consumption periods as we head towards spring and summer.
"Thus, we would not be betting against any significant drop in price or consumption long term. With the price of crude in the $85-100 price range exploration and production of oil will continue.
"The iShares Dow Jones U.S. Energy Sector Index ETF (ASE: IYE) allows you to play the entire sector based on the Dow Jones Energy Index. It has held support near the 200 day moving average after testing support near the $116 mark.
"It looks like a trading range is in the process of developing short term. This would set up the next trading opportunity. If we break out of the topside of the range, $126, it offers an opportunity to go long with a target of $136 short term.
"Meanwhile, other opportunities exist here such as the SPDR Oil & Gas Exploration and Production ETF (ASE: XOP) which is or exploration for oil and gas. With the pullback near $50 this is an attractive entry point near term with a stop at $48.27.
"iShares Dow Jones US Oil Equipment (NYSE: IEZ) is the ETF for equipment and services sector which is consolidating near the lows and could offer an opportunity as well. There are short term opportunities in the energy sector with the key being patience for these plays to develop. On the other hand the long term trend is still bullish."
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