Note: Please look for the interview with Jay Kaeppel in the November 2009 issue of "Technical Analysis of Stocks and Commodities" magazine on newsstands now.

"Energy" is a huge topic these days. Once upon a time we pretty much felt like there was a limitless supply of whatever we needed to fuel our cars, heat our homes, run our factories (and more recently and more importantly, to charge our iPods). Now we are not so sure. Now there is angst. Carbon - which has been the basis for human life since the dawn of time - has now been designated by the U.S. federal government as a "pollutant." No, seriously. So "traditional" forms of energy - namely, oil and coal - the two primary forms of energy that have fueled just about everything in the past century - have recently been demonized to the point that most people feel one or more of the following:

1) Guilt regarding their very existence (OK, granted people in this category probably already had some issues).

2) Fear that massive energy shortages could arise.

3) Fear and anger that energy prices may "necessarily skyrocket" as government tries to force people to use less carbon-based energy.

4) Fear that all of the above will happen and will prove to be unnecessary.

5) Fear that global warming will in fact ultimately wipe out the planet.

6) Sheer horror at the prospect that starting their car may be the last straw that craters the environment once and for all and causes the apocalypse (I mean, who wants that hanging over their head?).

We are told that the answer to all of this is "green" energy, and I am all for green energy. Nevertheless, I can't help but to think that it might make sense to find some form or forms of renewable energy that can be made widely available before we kill off - or raise to exorbitant levels the price of - oil and coal, etc. Just a thought.

THE ENERGY "DEBATE" (SUCH AS IT IS)

When it comes to discussing energy and the environment, etc., there seems to be a lot of shouting involved these days. On one end some people take a fairly even-handed approach, pushing conservation and more research into the area of renewable forms of energy all the while advocating that a steady supply of "traditional" energy be kept flowing in the meantime. At the other end of the spectrum there are those who go so far as to advocate sterilizing large swaths of women in a desperate attempt to drastically reduce humanity's carbon footprint.

In any event, whether you ascribe to the "Ward Cleaver" approach, the "Meat Cleaver" approach, or something in between, the bottom line is that energy is front and center among topics of importance these days (currently ranked #2, right behind some people named Jon and Kate. Sadly, I am so out of touch these days I have no real idea who these people are, nor why I am supposed to care about them. But as far as I can tell, they must be pretty darned important and we should all be paying a lot of attention to them. As if we have a choice. But I digress).

So the world - yes I'm talking to you - finds itself in something of a conundrum. On the one hand we have the true believers in global warming warning the rest of us that unless we "do something" - i.e., as in something drastic - i.e., as in give up the lifestyle that we have evolved to over the past 100 or so years - and quickly reduce our carbon emissions "dramatically," essentially reducing our lifestyle to that of the agrarian society of the 1800s, the planet will be "lost." On the other end of the spectrum you have those who claim that man-made global warming is a man-made myth. Frantic members of both camps claim that "scientific proof" absolutely verifies their claims and that there is no chance that "they" could be wrong and that the other side is "whacko." Such is the intelligent discourse of the day.

And of course, all of this shouting causes a great deal of angst among those of us who are fully aware that we haven't the faintest idea how to interpret the "sure thing" science that both sides present as proof that "the debate is over." Should we buy a dinky hybrid and risk getting crushed by a guy wearing an iPod while driving a Hummer? Should we "dare to be different" and slap some dorky looking solar panels on our roof? And is there a soul among us who even dares to breathe the words "pit toilet"? Yes, we have much to fear in all of this.

So what should we do? Well, once a greedy capitalist pig, always a greedy capitalist pig, I guess. So when in doubt, let's try to make some money!

ENERGY ETFs - TRADITIONAL" ENERGY VERSUS "NEW" ENERGY

At this point there are essentially two groups of energy - the "traditional" carbon based forms and the new, "cleaner" forms of energy. Fortunately, investors can now gain exposure to different forms of energy quickly and easily using exchange-traded funds [ETFs].

Table 1 below displays ETFs that invest in "traditional" forms of energy, namely oil and coal. These funds offer a wide array of possibilities for those individuals who:

a) Are not concerned about global warming.
b) Are concerned but not ready to turn the power switch to "off" just yet.

c) Fear the effects of global warming but fear the effects of being poor a whole lot more.

Individuals who assume that "traditional" forms of energy will be around for some time to come might focus more on the funds listed in Table 1.

Table 1 - ETFs investing in "traditional" forms of energy

Table 2 displays the ETFs that invest in "newer" forms of energy. While some are considered "cleaner," in the case of nuclear and natural gas, they are not generally deemed to be as "bad" as those listed in Table 1. In any event, an individual who believes that a large scale move to alternate forms of energy is inevitable might consider looking more closely at the funds listed in Table 2.

Table 2 - ETFs investing in "newer" and/or "cleaner" forms of energy

COMPARE AND CONTRAST

Now let's look at some recent price action for "old" and "new" energy ETFs. In Chart 1 we see the price action for iShares Energy Fund (XLE) which invests in a wide range of companies that deal in traditional forms of energy. In Chart 2 we see the price action for Market Vectors Global Alternative Energy (ticker GEX), which invests in companies that deal in, well, alternative forms of energy.


Chart 1 - iShares Energy (XLE)

Chart 2 - Market Vectors Alternative Energy (GEX)

Just looking at the time period contained in these charts, XLE has advanced roughly 20%, while GEX is down slightly.

Now let's look at "dirty" versus "clean." In Chart 3 we see the price action for Market Vectors Coal (KOL) that invests in companies involved in coal related energy. In Chart 4 we see the price action for Market Vectors Solar Power (KWT) that invests in companies involved in the generation of - you guessed it - solar power.

Chart 3 - Market Vectors Coal (KOL)

Chart 4 - Market Vectors Solar Energy (KWT)

Interestingly, in the past twelve months KOL has roughly doubled in price, while KWT is down roughly 12%.

For now, the degree of correlation between the prices of these various funds - whether good energy or bad energy - remains quite high. Energy stocks of all forms got hammered in the second half of 2008. So far in 2009, the "traditional" forms of energy have rallied more that the "alternative" forms. Still, it may be too soon to draw any conclusions regarding future trends or the investment .

SUMMARY

Let's face it, apocalypses are tricky things to predict. And even if you do get it right, what exactly is the upside? So rather than debating the relative merits of arguments that most of us don't understand anyway, let's ultimately focus instead on what we do know. And that is that the price of energy will fluctuate over time. So will the fortunes of companies involved in various segments of the energy business.

There seems to be a lot of hysteria building these days. Will the world really end in 2012? It beats me. Still by paying attention to the trends of the ETFs listed in Tables 1 and 2, investors may at least be able to garner some profits in the meantime.

Remember Jay's Trading Maxim #753: While those around you are losing their heads, take the road less traveled.

Jay Kaeppel
Staff Writer and Author of "Seasonal Stock Market Trends"
Optionetics.com ~ Your Options Education Site

NOTES:

Please look for the interview with Jay Kaeppel in the upcoming November 2009 issue of Technical Analysis of Stocks and Commodities magazine.

To learn more about Seasonal Stock Market Trends: The Definitive Guide to Calendar-Based Stock Market Investing, please click here.

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