The energy sector's been a tough place to make a living this year, that's for sure. Entering today's trading, less than 10% of the components of the Energy Sector Select SPDR ETF (XLE) are above their simple moving averages. Except for the refiners, who have taken advantage of a continuing Brent/West Texas Intermediate crude disconnect, most of the multinationals, oil services and certainly beta exploration-and-production players have been slumping with the quick 10% drop in oil prices over the last two weeks.
The first thing to wonder is whether oil's drop is a canary in the coalmine for the market in general. Historically, this has not been the case and oil has been a poor indicator of general market momentum. Even in the crash of 2008, the stock market was well off its highs when oil began its death dive in July. Despite deep periods of near 90% correlation, you can't rely on oil to tell you much about the stock market.
So, if we're left with an oil market that is now more reactive to bearish fundamentals and a QE-injected stock market that is leaving the oil sector behind again, what should we do with our portfolios?
It has been my plan throughout 2012 to keep as long-term capital gains the dividend producing multinationals and distribution producing master limited partnerships, while trying to trade around the high-beta E+P players as they have come in and out of favor. While missing a few choice trades in refining, this strategy has done well. We weathered a dip in MLP names and collected good dividends and solid upside from the likes of Exxon Mobil (XOM), Linn Energy (LINE), Encana (ECA), MarkWest (MWE), SeaDrill (SDRL) and others. But we need to begin carving up our holdings and harvesting profits as the energy environment changes.
This is not just a reaction to a potential fiscal cliff, although the chances of a grand bargain after the election are not so great. It is a macro view towards an oil market that is temporarily under pressure while stocks continue to show strength.
My rule in these situations is to look at the extremes of my portfolio and find names that have done either extremely well or extremely poorly and start chopping those first. Of the names I hold and have shared in the past year, the three I am going to sell are El Paso Partners (EPB), SeaDrill and TransMontaigne Partners (TLP). All have done spectacularly well since they were initiated.
If you've held these names as long as I have, you can develop a very bad loyalty to the shares. You've held through thick and thin, watched the shares finally move strongly in your favor and are loathe to sell. Don't be afraid. Besides the advantage of locking in a 15% capital gains tax on the profits, which may not be the case in the future, you can always buy the shares back. Always.
With a confused energy picture, now is the time to raise some cash. Do it selectively and look at your biggest winners and losers first.