A Strategy for Uncertain Times in Energy

There has been no shortage of red ink in the market lately.

Paltry new jobs figures (69,000 new jobs, less than half of what was expected) have combined with the ongoing mess in euro zone and lagging figures from China to sap investor confidence.

This latest action will further depress oil prices, as the rash of bad news translates into even more knee-jerk projections of reduced demand.

Of course, it's much too early to make such predictions based on the news, but the pundits do it all the time.

In any case, we are now in a downward movement that will end only when the market manipulators say so.

When this happens, individual investors always take it on the chin.

That's why I want to take a moment today to outline for you the strategy I use for my Energy Advantage and Energy Inner Circle subscribers.

Of course, if we could time the market, or invest in perfect hindsight, we wouldn't need an investment strategy.

But while some of the largest investment banks are getting it (very) wrong these days, crystal balls seem to be in short supply.

So what should we do?

Well, there are three overriding considerations you must keep in mind when approaching the energy sector in an environment like this.

  • First, know that this, too, shall pass. Take a deep breath and relax.
  • Second, keep your power dry. There is no point in chasing uncertain shares in an uncertain market, simply because some talking head on TV says they are undervalued. In the current situation, almost 80% of the shares I follow are well below market value. However, until the market finds equilibrium (something it always does, by the way), the undervaluation means little. Nibble when you feel targets are cheap enough, but never go all in.
  • The third point is the single most important thing to remember here. A situation like this one demands that you preserve your investment capital. Uncertainty is always the mother of discretion. The energy sector has been hit harder than the market as a whole for much of the last six weeks. That means you need to set up an exit strategy and stick to it.

Our Energy Strategy Works to Preserve Both Principle & Gains

The approach is easy and straight-forward. It involves establishing a pre-determined trailing stop and then selling your position if the asset trades through that stop.

No questions asked.

A trailing stop will establish a level, say 35%, from the highest price the stock reached while you have owned it and set that as a pricing limit for the sale.

Now, there are two more things to keep in mind here.

For shares that have performed well, a trailing stop will sometimes oblige you to sell even though the stock is still making your portfolio a profit. Remember, this is not only about paring losses, but also preserving your original investment and even locking in some of those gains.

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