Oil is down...again.
It broke through $40 a barrel again yesterday morn.
Then through $38 by the afternoon.
When will it end? At this point, all we can say is the end is much closer than the beginning.
But that’s not why we’re going to analyze today.
I can show you endless charts about oil supply and demand levels.
I did that, however, for years between 2011 and 2014. No one cared.
There’s a much more important chart I want to go over with you today.
It’s a chart that explains oil’s collapse, why it seems to keep getting worse and worse, and how to prevent yourself from being crushed when the next bear market begins.
It’s pretty much the perfect chart...
The Most Important Chart You Will Ever See
I know we’ve gone over the future of oil in one chart before.
It clearly predicted all that’s going on now. Hopefully it steered you out of oil and energy stocks over the last year too.
It’s a simple chart. Simple idea. And turned out spot on correct.
Today’s chart is related to that, but applies to all assets everywhere.
Here’s the chart:
It shows the cycle all financial assets go through and the emotional reaction you will* have at each stage of the cycle.
*We all have those emotions. Good investors just react to them better.
That’s the cycle right there. The most important thing an investor needs to understand to be successful.
Knowing the cycle and how to deal with it will mean the difference between getting rich in bull or flat market and getting crushed in a bear market.
Oil is an ideal and recent example of this cycle.
It’s Not Just Another Theory
Crude oil prices have been the subject of a lot of speculation over the years.
In the later stages of the current bull run -- between 2012 and 2014 -- that speculation focused on how high oil prices will go.
Remember the calls for $200 or $300 oil back in 2007? Well, they were starting to come back in 2014. Sustained near triple-digit oil prices will do that. They bred complacency.
Then, about 15 months ago, it all changed.
OPEC, led by Saudi Arabia, said it would keep the spigot open regardless of price. They’ve kept their word too.
The initial announcement caused a quick drop in oil prices. From $110 to $90.
That seemingly small move, however, was the death knell for oil and stocks and we knew it at the time.
Why? Because of the cycle.
We knew once the first puncture in the oil bubble was made, it would be over.
Once oil prices dropped, people would look at oil again. And when they would look at oil, they would realize there’s no fundamental reason oil prices should be so high.
The cycle would then come into play and what we’re going through now (well, what other investors are going through now) was inevitable.
First, it started out with a lot of “Anxiety.”
Investors bought the first dip as they tend to do. If you like it at $110 you have to love it at $90...right?
Wrong. Oil prices didn’t turn around. They fell more. This time from the $90 to $75.
“Fear” and “Desperation” were setting in. And oil insiders were taking advantage of the seeming opportunity.
That November retail investors were plowing money into oil ETF’s at record pace. The total investment made up a $334 million bet on oil prices rebounding.
It was due to end badly. Why? The cycle hadn’t run it’s course. They were too early.
The next step on the cycle came another after oil prices slid to $60.
This drop brought us to the point where industry insiders bought big. We reported on the record level industry inside buying here.
We also warned it wasn’t the end. Why? Again, the cycle hadn’t run it’s course.
Now, with oil below $40 a barrel again, hopes consistently dashed during each bounce, we’re clearly in the late stages of the cycle.
The clearest indicator of that is the “safe” oil stocks are now tanking too.
The safest stocks in the oil sector are the pipeline companies. They are going to transport oil whether it’s $10 a barrel or $100.
The pipelines are big, safe, and high cash-flow assets in the oil and gas business.
Most pipeline companies are made available to public investors in the form of Master Limited Partneships, or MLPs.
These MLPs have done tremendously well throughout oil’s rise. The index which tracks them has delivered a total return of about 1500% over the past decade.
Pretty good. But if you know how the cycle works, you knew it wouldn’t last.
The Alerian MLP Index is down 50% in the last year.
The two coal mine canary MLPs we said to watch closely are leading the way.
Breitburn Energy Partners (BBEP) was down 22% yesterday. It hit 80 cents per share. That’s a 90% decline when we warned this stock was anything but “safe” when it was $8 a share.
Worse yet, the other major MLP we warned about, Linn Energy (LINE), was down another 15% yesterday. Thats’ 84% below when we warned about the “safety” of these stocks earlier this year.
How did we know all this and avoid oil throughout this when many voices told us the complete opposite?
It’s not because we’re geniuses or particularly thoughtful.
Quite the opposite in fact.
We’re humble enough to have learned from and respect the cycle.
We experienced the cycle many times before. We’ve had our own money on the line too so the lessons really sank in.
And I can tell you from experience, after you’ve been through this cycle a few times you either learn it, follow it, and profit from it or you eventually run out of money.
The choice is yours.