As you are probably aware, and for obvious reasons, when writing here I typically stick to energy markets, writing about either stocks in the sector or the commodities that underly them. That isn’t exactly a hard thing to do. Energy is an interesting sector, not least because it often moves without regard to general stock market sentiment. If oil is rising, stocks in the oil and gas industries will post gains almost whatever the sentiment around stocks in general, or it could be that rising output or some other fundamental influence holds energy stock back in a bull market. That lack of correlation makes energy not just interesting, but also essential to investors who want a properly diversified portfolio, and a good hiding place when circumstances make the broader market vulnerable, such as they do right now.
It doesn’t look that way to some people, I’m sure. I mean, the S&P 500 keeps hitting record highs and closed above the psychologically important 5,400 level for the first time this week. On top of that, we have seen some spectacular pops in stocks after earnings in the tech sector. AI fever is translating to big sales for those supplying the boom, like Nvidia (NVDA) and Broadcom (AVGO), and exciting forecasts from others who will be actual users and deployers of AI programs, such as Microsoft (MSFT) and. more recently, Apple (AAPL).
It looks like the US economy is dealing with higher interest rates well and can continue to grow as well, and everyone seems…
As you are probably aware, and for obvious reasons, when writing here I typically stick to energy markets, writing about either stocks in the sector or the commodities that underly them. That isn’t exactly a hard thing to do. Energy is an interesting sector, not least because it often moves without regard to general stock market sentiment. If oil is rising, stocks in the oil and gas industries will post gains almost whatever the sentiment around stocks in general, or it could be that rising output or some other fundamental influence holds energy stock back in a bull market. That lack of correlation makes energy not just interesting, but also essential to investors who want a properly diversified portfolio, and a good hiding place when circumstances make the broader market vulnerable, such as they do right now.
It doesn’t look that way to some people, I’m sure. I mean, the S&P 500 keeps hitting record highs and closed above the psychologically important 5,400 level for the first time this week. On top of that, we have seen some spectacular pops in stocks after earnings in the tech sector. AI fever is translating to big sales for those supplying the boom, like Nvidia (NVDA) and Broadcom (AVGO), and exciting forecasts from others who will be actual users and deployers of AI programs, such as Microsoft (MSFT) and. more recently, Apple (AAPL).
It looks like the US economy is dealing with higher interest rates well and can continue to grow as well, and everyone seems to be feeling bullish. On Wednesday, for example, even after the Fed said they are now looking at only one rate cut later this year, stocks posted gains on the day. It is not that long ago that a hint that there might be three or four cuts this year rather than the six or seven that the market was looking for would have caused a selloff. Now, though, from a higher starting point for the indexes, a prediction for one cut does nothing to restrain the bulls. Everyone is on board the bull train and it seems that the only way is up!
If you are a regular reader of my scribblings, though, you will know that that is exactly what worries me.
Unanimity of thought in any market is a very dangerous thing. When the mood starts to change, and it inevitably does at some point, the rush to exit a crowded trade can result in big gaps and a massively exaggerated move in the opposite direction. That is a serious risk if you buy stocks at these levels.
Don’t get me wrong, I am not saying that there is any logical or fundamental reason to sell right now. It’s just that once one becomes clear, it will probably be too late to get out with any decent profit intact and I would rather sell in front of that time. That, though, leaves one with a dilemma. As I am very fond of saying, the market can stay illogical a lot longer than you can stay solvent, so the fact that stocks will turn around some point doesn’t mean that that point is imminent, and selling too early into a strong rally like this and sitting on cash can cost you more than you stand to save, even if you are eventually right and there is a drop.
All of this risk, though, is concentrated in one quite small area of the market, so the best way to guard against it is diversification, and that is where energy stocks come in. I am currently taking some profit on some high-performing tech stocks that I own and using the cash to buy the likes of Shell PLC (SHEL), Chevron (CVX), and some smaller US domestic companies like Antero Resources (AR) or Diamondback Energy (FANG).
There is no guarantee that if sentiment does turn and a correction in tech drags everything else down with it, those stocks will remain unscathed. However, they exist outside of the bubble, if that is what we are seeing. They are certainly driven by more than just overall market sentiment, so they can be expected to do what they always have, to move independently from the broader market. Sometimes, as has been the case for the last few months, that works against you, but at others, such as well see over the summer if I am right, the contrary, quirky nature of energy stocks can be an investor’s best friend.
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