Are You Ready For The January Effect?

2. Bearish calls for the oil price dropping below $50/barrel ($50/bbl) are widespread; a contrarian investment view would support a rebound to above $60/bbl. Fundamentally, it is widely accepted that oil prices at $60/bbl are extremely damaging to supply from marginal fields and prolonged trading at this level would result in a lot of supply shut-ins, thus removing any supply overhang within 6–12 months; markets are likely to discount such change in supply with a 3–6 month lead;

3. Large short-selling interest built up in the months of November and December that may be closed on first signs of rebound—mid-cap shares are likely to respond first, followed by small caps after a sustained rally.

We believe, nevertheless, that investments should be focused on companies with strong production growth even at lower oil prices based on sustainable capital expenditure programs (primarily funded out of organic cash flow), lower average cost of production contributing to profits at current prices and strong balance sheets with low debt and fixed obligations. Examples of such companies include RMP Energy Inc. (RMP:TSX), Advantage Oil and Gas Ltd. (AAV:TSX) (AAV) and Parex Resources Inc. (PXT:TSX.V).

We are generally cautious/bearish on the overall markets as we feel global economic growth is likely to slow, impacting earnings expectations. Central banks of both developed and emerging economies may raise interest rates, thus further slowing growth and negatively impacting equity valuations. Resources sectors have been sold off hard, so it is unlikely they would suffer further in correlation to a general market correction.

Look for an article about the January Effect on precious metals in The Gold Report on Wednesday, Jan. 7.

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1) JT Long conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to ...

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