When it comes to investing, I’m afraid I’m a bit of a sadist. On days when the market falls in value and pain is at its greatest, my endorphins kick in and a smile crosses my face.
Why?
Simply put, out of pain comes gain. Like anything in life, there is a yin and a yang. We don’t get anywhere without a little blood, sweat and tears. What goes up must come down and vice versa.
That’s why last Friday’s action in the market did not bother me in the least. In fact, if you have been reading my articles and postings, you know that I was expecting such a day (and probably a few more like it to follow). Here’s how to capitalize on last week’s stock market carnage.
Capitalize on Stock Market Carnage
The good news is that the carnage from a day of skyrocketing oil prices and rising unemployment creates the landscape for future gains.
Think of it as stock market regeneration.
For example, a forest fire is a horrible sight with incredible destruction of previously beautiful landscape. As disastrous as fire can be, such devastation is part of Mother Nature’s plan. Trees that burn release the seedlings that will allow the forest to grow again. It is all part of the life and death theatre that gets reenacted time and time again.
So it is in the stock market.
From the losses and pain come future gains. Capitalism is an extension of Mother Nature and from time to time, the excess must be pruned to make way for the new.
Oil Stocks: Adding Fuel to the Fire
As for Friday’s action, the move in oil stocks was mostly attributed to hawkish statements from Israel regarding the possibility of military action against Iran. The geopolitical wild card is only adding fuel to the fire.
In some ways the 10% one day move in oil prices could be viewed as the blow-off top of a speculative bubble in oil stocks. From a pure supply and demand standpoint, nothing changed on Friday.
As for the specter of military action in the Middle East, the market has plenty of information to properly price such events. In other words, the possibility of an Iranian conflict is discounted into market values. Or at least it should be in an efficient market.
The bottom line here is that the struggles in the market today are creating opportunities for tomorrow. And if anything, the market is adjusting to the reality of higher prices by changing behavior.
Take General Motors (GM) for instance. I wrote about GM’s recent stock bounce just last week in “Can GM Make a U-Turn?” Automakers like GM are revamping production to meet demand for more fuel efficient vehicles, since consumers are driving fewer miles, and investment in alternative energy is skyrocketing.
What to Do Now
Use the rise in oil prices to liquidate shares of your oil drilling and exploration positions. These stocks are at or near a peak. On the long side, be prepared to plant your seeds. There are plenty of attractive sectors worthy of your attention.
Tomorrow, I will provide a midyear checkup for your portfolio with some suggestions of where I think you can do particularly well for the remainder of the year.
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