INVESTING: Bouncing oil prices frustrate, but energy stocks won’t

Oil. It’s not behaving well lately.

There was the preelection run-up to near $56 a barrel; then it seemed like prices would settle down for a few months at least.

We had a little bit of warm weather to spur some selling, then, boom! The temperature dipped and, as if cold weather in January were a surprise, oil headed back near $50.

I noted last month that it would probably be stuck in a trading range of $40 to $55, but I was hoping it would spend more of its time in the lower end of the range.

A lot of oil and gas companies must be printing money in their basements with energy prices this high. The sector has been consolidating since early November, but it looks like breakouts are coming soon.

The American Stock Exchange is home to many energy-related companies, and the index that measures the exchange is only 3 percent away from an all-time high. Also, scanning the new highs list of the last few days shows a large number of oil and gas companies.

The two industries that are doing the best within the energy sector are oil refining and marketing, and oil and gas production. A scan of the individual stocks in these industries demonstrates a lot of stocks that either have broken out or look as if they are about to. Buying stocks and groups that are breaking out to new highs often proves profitable. I believe this time will also yield positive results.

When I see a group about to break out, I like to find the strongest five to 10 stock in that group. In this case, the overall market has been down a few weeks, so stocks that are performing well now could put on some solid moves as the market turns higher.

It is an easy exercise to find the strongest stocks in a given time frame. Any charting service offers relative strength indicators. With the oil and gas stocks, I am looking for the best during the last eight weeks.

A few of the better-performing stocks are Halliburton Corp., Diamond Offshore Drilling Inc. and Valero Energy Corp. I own all three of these stocks.

I also like the oil and gas stocks because they can sometimes trade in an uncorrelated fashion to the general equity market. For the next few months at least, it doesn’t look as though high oil prices are going to dampen most stock prospects, but high oil prices are a definite plus for energy-producing companies. Some money management has to come into play here, and I am putting 10 percent of my portfolio into the 10 strongest stocks in this group. I would expect the group to move at least 15 percent in the next three to four months.

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A quick follow-up to last week’s comments on interest rates. The Bank of England has now kept rates the same for five months. Housing prices there are declining and retail sales have been sluggish lately.

The Bank of England is a good barometer because it is typically a few months ahead of our Federal Reserve on most campaigns. So, using history as a judge, I expect our Fed to raise rates two more times and then rest.

If that’s the case, this whole inflation thing was blown out of proportion.