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April 12, 2016

Foreign Energy Stocks: Don’t Take the Bait

Crud oil prices shot 22.6% higher in the four weeks ending March 18. That was its best four-week stretch of performance since June 2009.
Naturally, it was impossible for investors to ignore that phoenix-like rise from the ashes, as it was widely cheered in the mainstream financial media.
But after watching oil drop 15% in 10 days recently… you have to wonder: who still has the stomach to be an energy bull!?
Put yourself in their shoes…
Between April 2011 and June 2014, you watch oil prices go nowhere… losing about 1% in 38 months.
Then, you watch a “rout” chop 50% off the price of crude in six months – between June 2014 and the start of 2015.
You’re thinking: “That was rough! But surely the worst is over.”
Then, after falling to new lows in March 2015, crude rallies some 37% into May.
Suddenly, you have hope again! “The new bull market must be just beginning,” you think.
But then it tumbles again… deepening its drawdown to 60% by July… 70% in December… and 80% in February of this year.
The point is: no one’s made money being an energy bull in the last five years… but everybody wants to believe that higher energy prices are just around the corner.
I’m here to tell you: don’t bet on that just yet!
Of course, most retail investors don’t invest directly in oil.
We’re more accustomed to buying stocks than commodities. So when popular sentiment is bullish on energy commodities, like oil and natural gas, you tend to see energy-sectorequity markets get a boost…
And you see an upswell in the stock markets of major energy-producing countries… like Brazil, Russia and Canada.
That story hasn’t been as prominent in the mainstream media. But my Cycle 9 Alertalgorithm has picked up on the recent interest in the stock markets of these countries.
As I told my Cycle 9 subscribers on Tuesday, the stock markets of these three countries are ranked at the top of our International Leaders & Laggards Board
Russian stocks (RSX) are ranked #1… after gaining 8.1% year-to-date.
Canadian stocks (EWC) are ranked #2… up 7.1%.
And Brazilian stocks (EWZ) are ranked #3… with an eye-popping 22% rally since the start of the year!
Each of these energy-driven foreign stock markets has easily beaten the returns of major U.S. indices in 2016. And each one is currently a “buy,” according to the rules of my Cycle 9 Alert system.
  • They’re in a six-month uptrend, and
  • They’ve built up market-beating momentum over the last three months.
The fact that my system is triggering buy signals in the stock markets of major energy-producing countries suggests investors are once again anticipating better days ahead for energy prices.
But while these signals are certainly prompting us to take notice, I’m not convinced that high-risk energy bets are the best place for your money in this environment.
For one, we’re less than a month away from the stock market’s notorious seasonal soft spot – the start of “Sell in May and Go Away.” If investors prove to be exhausted from the rockiest first four months of a year ever… they may go into hibernation come summer, leaving energy stocks without convicted buyers. What’s more, May through September has historically been the worst time to buy energy stocks.
Second, both the U.S. energy sector (XLE) and crude oil (USO) are still in long-termdowntrends. I hate fighting the trend… so even though Russian, Brazilian and Canadian stocks have reestablished uptrends, bullish investment in those markets require going against the dominant trend in oil prices (which is still bearish). That’s risky.
And finally, my World Spread Indicator says now is not the time to be overly bullish.
This indicator – which measures the spread between top- and bottom-performing stock markets around the world – is unusually high. Currently, it’s at 36% – showing a three-month gain of 18.2% from Brazilian stocks (EWZ) and a three-month loss of 18.4% from Italian stocks (EWI).
My research shows that any time the World Spread Indicator is below 25% – it’s a good time to invest in the riskier corners of the stock market. But when the spread is above 25% – as it is today – you’re more likely to do better in defensive investments, like bonds.
All told, I’m interested in the recent rally mounted by the stock markets of major energy-producing countries… but, I’m not yet comfortable being a buyer.
For now, you should let the bottom-picking energy bulls have a go at Brazil, Russia and Canada. At this point, the excessive risk isn’t worth the potential reward.
Courtesy of Adam O’Dell, CMT, Chief Investment Strategist, Dent Research via Economy and Markets  
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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