Watch Your Energy Stocks

I want to caution you on something… Lately, we’ve seen a solid correlation between the rising price of energy and related stocks. The better the economy looks, the more energy strengthens and the better things seem to get for energy plays. In August, the rising tide of oil prices lifted the share price boats for oil and oil service companies. That’s good, right?

Obviously, investors look at rising energy prices and believe that higher earnings will eventually follow in the energy patch. That’s the idea. And I too am very bullish on energy, for a lot of reasons. But my view tends to be to the far horizon.

In the short term — the rest of 2009 — we could still see severe swings in energy prices, especially related to general economic conditions. If the broad economy starts to slip into stagnation, or if it retreats in an economic swoon, the stock market party could be over in a New York minute.

If that happens, you should also expect to see lower energy and energy share prices. That’s my cautionary caveat.

The Daily Reckoning