Market lessons from the recent price action in the energy sector

We can not predict the future. That is why proper diversification across unrelated assets is the best proposition in investing.

A good lesson is the current price action in the oil and energy sector.

This is how we were positioned for these circumstances:

Given this historically disruptive situation in the Strait of Hormuz, we took an early overweight position in energy equities. From a risk-reward perspective, it seemed the most obvious at the time, given the instruments available to us to trade in the sector. We understood the potential disruption to the global energy market. So we sold some positions that usually do not work in a risk-off scenario or are disrupted by the oil shock.

We observed how our position responded to news flow and developing events.

The headline volatility during the conflict provided a good rehearsal on how our positions respond to both escalatory and peace-attempting events.

Our energy equities did not appreciate much in price, given the circumstances.

The AI theme on the other side was on fire.

We started looking for reasons to exit because the price action did not confirm our thesis.

After the conflict reignited over the weekend before June 8th, some of the equities we are tracking from the energy stocks basket failed to rally.

Based on this news failure event and other information we observed in the conflict’s dynamics, we sold most of our speculative energy holdings, except for some higher-quality holdings that we believe are undervalued. These are a good investment because they pay good dividends and help diversify the portfolio.

During this sell-off, we once again realize the importance of having a defined stop-loss when speculating on an asset’s price direction.

We were overweight, but the stop loss saved us in time from the blood bath that followed.

Paraphrasing Jason Shapiro from The Crowded Market Report, you are incurring big losses because you are not disciplined enough to take small losses.

Usually, when your view is correct, the market price action confirms it.

We learned our lesson.

In the current market conditions, we will take a more active role, putting on the trader’s hat and applying principles that have proven effective in trading.

We recommend this Substack article by Ray Dalio that explains his philosophy of “Diversify Well”.

Disclaimer: This newsletter is for educational and informational purposes only and does not constitute investment advice. The author may hold positions in the assets discussed. By reading this, you agree to our Full Legal Disclaimer.