MCLEAN, VA (EnergyStrategist.com) -- Jesse Livermore was perhaps the most famous stock trader of the early 20th century; he made and lost millions of dollars in his day. And, for the record, that was a lot of money 100 years ago. Livermore was most famously immortalized in Edwin Lefevre's thinly veiled biography Reminiscences of a Stock Operator, probably one of the best and most helpful books on trading and investing ever written.
One of Livermore's trading rules was "Be Right and Sit Tight." He also said this is one of the hardest lessons for any investor to learn. In other words, Livermore suggested jumping on board a major trend and then having the courage to hold on to make the really big gains.
Clearly, energy is just such a major trend. As I've outlined on numerous occasions in The Energy Strategist, demand for oil and gas is booming while the world's ability to expand supplies and production is, at best, limited. The great commodity bull markets throughout history have lasted for at least 15 to 20 years--this current up-cycle has more than a few good years left in which to run.
But that doesn't mean there won't be corrections. Long-term readers are well aware that we've seen three significant energy corrections during the past 12 months. Each pullback lasted between one and three months and resulted in prices 15 percent to 25 percent off the highs for most stocks in the group. Each pullback also represented an excellent buying opportunity as the group subsequently rallied to new highs.
The important thing to remember is that no great bull market has been immune to such corrections. Even the Nasdaq in the 1990s and gold in the 1970s saw corrections of as much as 30 percent in the context of a longer-term trend higher.
These corrections make following Livermore's "Be Right and Sit Tight" rule so difficult. All too often, investors panic and get shaken out of the market during these corrections, thereby missing out on the even greater returns to come. At the same time, investors are correct to want to protect their gains; after all, making big money on a stock only to watch it evaporate is a sad strategy indeed.
By late April even energy bears were giving up and jumping into the sector; greed and the desire not to miss out on big gains were the prime emotions driving the market. Technical analysts (also known as chartists) term such action a "blow-off top." Normally this sort of parabolic rise and fall leads to a correction that lasts for a few months.
It seemed rather odd to be speaking of a downturn with oil spiking toward $75 per barrel and energy stocks breaking to new highs. Never the less, I warned my subscribers of the possibility of such a correction in early May. Click here now to read my May 3 report.
The fundamentals for the energy sector have never been stronger and I'm convinced any future corrections will appear in hindsight to be some of the greatest buying opportunities. I continually remind my subscribers (many of whom are retired and have little desire to gamble with their nest eggs) that every great bull market in history has seen periodic vicious corrections of as much as 30 percent before ultimately rallying to new highs. It's these ugly sell-offs that tend to shake out investors at just the wrong time; investors panic near the lows and bail out of their investments.
Follow the Smart Money
As you know, our world is mired in a perpetual energy crisis with supply and demand figures becoming more glaringly disproportionate with each passing day. This is not to mention the madness in Middle East, geopolitical instability with Russia and Venezuela, a soon-to-come day of reckoning with Iran, and utter devastation if another hurricane strikes our Gulf Coast.
If any one of the aforementioned conditions were to worsen or explode, we could easily see oil futures blast higher. This scenario would create public outcry over gasoline prices and our dependence on oil, which in turn would naturally generate an immediate and massive demand for energy alternatives across the board.
Copyright (c) KCI Communications, Inc. 2006
Elliott H. Gue is Editor of "The Energy Letter." Click here to sign up for the free bi-weekly newsletter.
