We’re at a very important time, for our trading purposes – one that requires some discipline and experience to manage. I’ve always called this moment “riding the wave”.
We’ve done just about everything right in establishing our energy portfolios: Buying only high-quality stocks in the correct subsectors; establishing positions at or very near to short-term, and in some cases, long-term lows and correctly foreseeing the major/macro trends that will drive the fundamental (oil prices) in our favor for a very long time to come.
OPEC remains committed to withdrawing supply and seeing prices rise for at least the next year, oil companies here in the U.S. are now focusing on value instead of breakneck production. Everything points to nothing but good results in the investments we’ve made.
But now what? What do we do for the next – at least 3-6 months – as we wait for the fundamentals to move forward and our stocks to rise further?
There are two distinct strategies you can employ; both of which I’ve used successfully over the years.
One I would call the ‘fire and forget’ strategy. If you’ve actually followed the correct patterns and are nearly completely invested to your risk limits, there is a school of thought to doing absolutely nothing – or at least the absolute minimum with current positions. If our oil thesis is correct and oil is headed back to $100 a barrel and more, we can take the attitude of merely sitting back and waiting. Of course, we will always need to monitor the markets for indications that our primary thesis is fraying at the edges – for example if $60+ oil prices will turn the tide on decreasing rig counts – but other than those tip-offs, we can relax.
The other is a more aggressive and ‘managed’ approach. It requires more maintenance but can yield far better results. The first temptation to be avoided in this approach however is ‘overtrading’ a position. Nothing can ruin a great portfolio like making a lot of wrong small moves and undercutting the fundamental correctness of the trade in the first place. That’s why I recommend working around no more than 20 percent of each position at a time.
We start by remembering that the same thesis applies as to ‘fire and forget’ – as long as our thesis is intact, we want to avoid any big moves that destroy the portfolio’s upside potential. As long as we keep this in mind, there are two interim moves we can make to ‘manage’ our positions going forwards.
1- The ‘snip’: This is simply a taking of a small amount of profits based on a stock or a subsector that has run too far, too fast and is due for a rest. This is normally followed by a re-buy of shares as prices moderate.
2 – The ‘snip/swap’: This is a managed choice of moving from one successful trade into another that is believed to be ready to participate. For example, I am of the belief that oil services will pose an opportunity later in the boom cycle than domestic E+P’s. Consequently, I am starting to look for ‘swap’ opportunities today in several owned E+P’s that have already begun to look rather heady given prices still below $55 a barrel.
Enough of the theory, let’s look at a possible trade:
(Click to enlarge)
Here’s SM Energy, one of my own holdings that I’ve recommended several times in columns in the last 3 months. For a ‘fire and forget’ player, there are reasons to do nothing here: SM has just begun to roll higher, breaking through its 200-day MA. It’s lifetime highs are above $40, so no reason to believe there isn’t a lot more room on the upside. But for a more aggressive player, there’s some good reason for a ‘snip’ at this level too: Five straight up days brought the stock near to $23, it’s RSI’s are nearing a critical level making more short-term gains unlikely and on the monthly chart, we’re coming up against the 50-period moving average.
Where might I think about a swap?
Schlumberger is reeling from an honest quarterly report that wasn’t at all bad on the numbers, but guided significantly lower for 2018 based on the dropping land-based rig numbers they (and I) expect. This is news that should come as no surprise for us or anyone else who’s following the oil markets, but it seems to have surprised shareholders. With shares moving towards multi-year lows, best-of-breed Schlumberger always seems to find its legs as it approaches $60. I expect this time to be no different. I wish we were later in the cycle to buy this one, but then again, you won’t see it near to $60 in 2018 – or at least that’s what I’m thinking
In all cases, make sure your moves are small – and don’t destroy the good work you’ve already done putting together a quality energy portfolio for the long haul. With that in mind, you have some options as you ‘ride the wave’.