5 Timely Oil Plays

11/10/2011 9:00 am EST

Focus: STOCKS

Curtis Hesler

Editor, Professional Timing Service

What of energy in last month’s stock market rally and the expectation of temporarily softer gold prices, asks Curtis Hesler of Professional Timing Service.

The stock market made a giant jump on October 27 off news that all was better in Europe. It looked more like a lot of shorts running for cover to me.

There apparently was some hanky-panky with the rules concerning credit-default swaps, and that sent the shorts on a buy-in spree. It is said of short selling, “he who sells what isn’t his’n must pay the price or go to prison.” Thus, panics can spook buyers just like panics can spook sellers.

The significant fact is that there was no real follow-through. Sustained market rallies must have follow-through. The October rally is not destined for the big time, and is not the start of a new bull market in the averages.

Energy stocks (including crude oil futures) jumped, as well as the S&P 500 and other averages. With the economy as fragile as it is, this is really counter-intuitive. If the economy gets better, more energy is demanded and oil prices go up in anticipation of that.

However, oil prices, as per Brent crude, are only about 10% from their highs. If the economy recovers, crude prices will soar to new highs—and that, in itself, along with crushing debts, will snuff out any recovery.

A friend of mine tells me that thinking only makes your head hurt. It is all in the technical action—in listening to the market with your technical tools. Just as Palio called the start of the rally, the market’s price action will tell you what to expect next. No real deep thinking is required.

The message from the energy market is, first, a positive signal from our Critical Price Point work—again in regard to the XLE (energy ETF). I don’t necessarily espouse trading this, as most of you are not interested in mustering the time and discipline for such activity. Still, the XLE positive signal bodes well for what to expect from the energy stocks going forward. The next negative reversal price for the XLE is $54.25.

Our CPP work has yet to kick in with a signal from Brent crude, but that is not far off. I substituted the Brent contract for West Texas Intermediate (WTI) a while back. Nevertheless, it is interesting that the CPP work just turned positive on the December WTI contract. I look for Brent to follow suit soon.

All in all, there are positive messages coming from my work in crude oil. I am still looking for new, all-time highs—certainly by the end of next year.

Energy is where you will find yield. Most of the issues on our list have come up handsomely since the beginning of last month, and there has been ample opportunity to acquire good-yielding positions over the last few months. I don’t advocate chasing stocks on the up side, as you know.

Blackrock Energy and Resources (BGR)
A closed-end fund similar to Gabelli Global Gold, they are diversified a bit beyond the oil sector.

Their largest holding is in coal. However, BGR offers you a broad commodity-advantaged approach with a yield currently indicated at 6.11%. It is still selling under our buy price of $28.

I wouldn’t get too carried away with BGR at this level since there are better capital-gains opportunities in some of our other recommendations. However, purchases limited to $28 or less will give you a properly aligned asset position with a respectable yield.

Enerplus (ERF)
A Canadian that is still trading under our buy price. If you are of a mind to buy into weakness, there is nice support at $25. If you are more anxious to get some of your money working, be sure to limit your buys to $30 or less.

The last letter encouraged you to “seize the day,” as prices were depressed and yields were very attractive at those levels. Prices have since recovered nicely, and some of our recommendations are above their buy prices. Nevertheless, many are close and deserve consideration if you are looking to put new money to work.

Watch Legacy Reserves LP (LGCY) and Linn Energy (LINE). They are paying an indicated yield at these prices around 7.4% and 7.2%, respectively.

Our buy prices are $29.50 for Legacy and $37.50 for Linn. As of this writing, both are just under their buy prices. These are excellent for yield.

Crescent Point Energy (Toronto: CPG) is also just under its buy price of $43. If you are looking for a stake in the Bakken—which has gotten so much well-deserved publicity lately—this is an excellent Bakken play with a yield of over 6.48% at today’s price.

Finally, I expect the Canadian dollar to recover well over the US dollar in the years ahead. Decent alternatives to the US dollar and the euro are few outside of gold. However, the Canadian loonie should become more attractive as the euro and US dollar duke it out in the currency wars, and traders and investors get tired of riding on the seesaw action between them.

A few weeks back, the Canadian dollar cost 94 cents, but it has recovered to parity now. I look for more strength in the loonie ahead, and that will translate to higher dividends from Canadian stocks when converted to US dollars. It will also inflate the share prices in US dollar terms.

Canadian energy stocks are excellent in providing dividends and are an advantage against the ever-depreciating US currency.

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