Thursday, October 05, 2006

Covering All Shorts in Oil Stocks -- But Not Buying

The carnage in crude oil, and energy stocks, looks to be finished -- at least for the time being. Both the daily and hourly charts seem to point to a recovery bounce, so I have closed out all short positions and put options in oil stocks.

However, the bounce could be fleeting, and prices could easily revisit their recent lows, so this is not the time to jump in buying with both feet. In fact, that time may not come again for an extended period. The newsletters I follow have either already sold, or will sell on this October bounce, somewhere between about 50% and 80% of their energy stocks. The "oil boom" of the past three to four years appears to be over.

Yes, oil prices will rise again, but oil & energy stocks should no longer be a big part of your portfolio. (If they were, you have been feeling a lot of pain since May.) Diversify into other areas.

The smaller company stocks have been leading the market for years, but it looks like that's changing. The big companies are now dominating and probably will for a good while. These things go in cycles.

In an earlier post I said high tech was going to be good. That still might be true, but it doesn't necessarily mean small companies. There are plenty of large tech companies also.

You will want to concentrate on investments that do well in a slowing economy. That's another reason to cut way down on energy stocks -- as the economy slows, we use less energy, thereby putting downward pressure on prices. And if China's economy slows also, the effect is multiplied.


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