An Oily Situation

May 22, 2006
By seadmin

One of the big concerns right now for both individual investors and those who make their living on Wall Street is what will happen with oil prices. How much of a "terror premium" is baked into the energy equation? Can oil drop below $60 a barrel and stay there? Will oil skyrocket past $70 a barrel? How much damage, if any, would $70-plus oil do to our economy?

Now all of these are legitimate questions to ask, but given the unpredictability and volatility in the energy sector, I don’t think any rational market observer can honestly say they know for certain how things will play out.

Right now I am telling my Successful Investing subscribers to take a small portion of their total portfolio and put it into energy stocks via Exchange Traded Funds (ETFs). Why am I betting on oil? I believe the continuing geopolitical strife (Iran, Iraq, Nigeria, Venezuela, and elsewhere) will continue to drive oil prices higher. I also think that over the long term, worldwide energy demand will exceed a politically fragile supply.

These conditions could translate into big gains for the sector. But what if I’m wrong on this one? Well, no problem. You see, I am a realist when it comes to money. I always enter into every position I recommend with a preset stop-loss. That means I know exactly how much am willing to lose in any given position BEFORE I move my money in. If things turn south on us, we will only get dinged with a small loss.

If you have any designs on becoming a wise investor, I strongly suggest you employ a strict sell discipline on any position you enter. You don’t know how many tales of woe I’ve heard over the years where people bought a stock or mutual fund and just watched it spiral downward to 20%, 30%, 50% or even a 100% loss. If you have that sell discipline in place, you will always be protected from catastrophic market losses.

So, what’s the next move for oil? I think we’ll see a sizable move either way in the price of crude after the whole Iran situation plays out in the weeks ahead. If the Iranians decide to play ball with the rest of the world community, then oil, and energy stocks, could witness a sharp selloff. If, however, Iran defies the U.N. and pushed ahead toward its stated goal becoming a nuclear power, oil and energy stocks could very well blast off.

The stage is set, the band will soon play, and we’re all going to hear this tune loud and clear.

To find out more about my new energy allocation, as well as the strategies that will help you profit regardless of market conditions, check out my Successful Investing service.

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