Energy Still Looks Like a Good Buy

04/02/2007 12:00 am EST

Focus:

Doug Fabian

Editor, Successful ETF Investing, ETF Trader's Edge, Weekly ETF Report, and ETFU.com

Doug Fabian, editor of Successful Investing, finds an energy ETF he thinks will capture that sector’s continued potential for strong gains.

The Federal Reserve dropped the phrase "additional firming" from its statement this time around, and instead said that future policy adjustments would depend on inflation and growth. Well, that was really all traders needed to send stocks soaring two weeks ago.  The Dow Jones Industrial Average enjoyed its best week in four years, rising nearly 371 points for its biggest weekly point gain since March 2003.  That point gain translated to a 3% jump for the week.

If we see a few more days of follow-through buying in the broad market, we could find ourselves right back into broad-based equity funds. (The Dow and other indices actually lost ground last week in choppy trading—Editor.)

In the meantime, there is one sector that I do want you to add to your portfolio. The sector is energy, and the exchange-traded fund I want you to buy is the Energy Select Sector SPDR (XLE).

So why XLE, and why now?  Well, first off, energy stocks have now surged well above their short-term 50-day moving average.  This is often a harbinger of more gains to come for this fast-moving sector, and we want to catch it now before it makes another really sharp move higher.

As to the why, well, it goes back to what we’ve discussed for the past several months with respect to oil, gas and energy.  You see there is nothing more powerful than the law of supply and demand to push stocks in a sector higher.  In the case of energy stocks, there is a growing appetite for energy of all kinds and a supply that’s fraught with artificial restrictions.

Those restrictions are due in part to oil’s unfortunate location.  As large supplies of crude oil reside chiefly under the deserts of the Middle East, all it takes is a little extra tension in that already tenuous geopolitical climate to drive oil prices higher. 

That little extra tension came to us from Iran, as that country’s navy seized 15 British sailors and marines in disputed Persian Gulf waters off the coast of Iraq.  That little stunt by Iran caused a barrel of crude to rise above $62, and it also helped lift XLE as the stocks in this fund include the biggest names in the energy business.

Given all of the factors I just cited regarding energy and XLE, I think it only makes sense to commit a bit of our capital to this potentially very profitable sector.

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