Oil's been in a bear market for more than a year – we've known that. But now the stock market is entering its own bear market, which changes everything about the way we now need to watch and trade energy stocks. It's going to make for a very tough year for me.
I am a lousy bear market trader. That only makes sense, considering I made my money trading oil on the floor from 1983-2007. Except for a relatively brief three year period in the late 80's-early 90's (when I struggled quite a bit), oil was in a one-sided bull market, traveling from the high teens to over $140 in 2007 as I pulled up stakes and left full-time oil trading - right before the big collapse.
During the few bear market corrections in oil during my time on the floor I would sell, but only for very short periods, remaining uncomfortable on the short side and dreaming of the bull market to come, when I would really score.
This 'style' carries over to my oil stock positions today, where I have for the past year looked for value moments to buy quality oil stocks – and watched them painfully go a lot lower. I made a mistake in thinking that the market would only punish overleveraged marginal producers with less than stellar acreage, leaving the good ones alone: I pointed out more than a dozen 'walking dead' U.S. producers as early as December 2014, and reiterated the call in March of 2015, warning investors to keep their powder dry and wait for value on what I called 'the survivors'.
But the market hasn't shown the 'balance sheet discipline' I thought it would – Recommendations of EOG Resources (EOG) at $72, Hess at $50 and Cimarex at $92 finds shares of each today at $64, $49 and $81 – and a lot of capital invested at pretty bad numbers.
The plus side is that, if you've followed me, you're not in any of the oil stocks I think are not long for this world – you've not put money in Halcon (HK) or Sandridge (SD) or Goodrich (GDP) or any of the many others I've labeled as goners. And I still believe that the survivor class I've found will be fantastic investments – once this bear market is over.
And that's the point, isn't it – when will this bear market be over? In oil, I've already said that I think things don't get substantially better until at least the 3rd quarter of this year, which if you poll the rest of the oil analysts out there is incredibly optimistic – most don't even see 2017 as a likely turnaround for oil. I think they're wrong, but let's look at the stock market in general for a second.
A bear market in stocks is one we need to come to grips with, because I think we've proven that it's upon us. China growth numbers are finally going to meet reality and our markets are ready to see the kind of multiple contraction that the end of the 6 years of Federal Reserve “Zero Interest Rate Policy (ZIRP)” is likely to bring.
Going back to our oil stocks, we are in a relatively better place, if only because 2015 was such a disaster for oil – you could rightly argue that much of the contraction in P/E's to come has already taken place in the oil patch in the last year.
But we can't fight on in that environment very happily either – while stocks in general may drop another 15 percent from here, it won't make us feel much better to see our oil stocks only go down by another 8 percent or 10 percent.
So what do we do?
One thing I won't do is add shares to positions. But I'm also not selling – not yet.
One attribute of bear markets, and especially an oil market which has gone parabolic to the downside, is the almost sure quick rebound, short covering blast. It's not usually a small one and doesn't signify a bottom either, although that will be the first question from everyone in the media when it appears. What it does signify is the fact that everyone has gone the same way at once (as the oil market is today) and is being punished for it.
We need to wait for this move – it's coming, believe me – and then lighten our positions into it. I am looking to sell shares on many of my oil positions near recent entry points, taking a small loss, and sell calls slightly above those entry points on the rest – leaving a core position in place. With our positions stabilized, we can again wait for the signs that the bear market we're entering in equities, as well as oil, is moderating, and again look for spots to buy our favored oil stocks for the inevitable turnaround I am still so convinced is coming.
Because I'm still pretty much the same exact trader I was in 1992 – dreaming of the next bull market, when I'll make my big score. And I won't ever leave myself in a position to miss that.