Relief!
At long last the S&P/ASX 200 (ASX: XJO) seems to be back on track.
The main bourse experienced its first positive week for 2016, jumping 0.5% last week…
It rose another 1.8% to 5,006 points on Monday, helping investors celebrate Australia Day just that little bit more…
And better yet, it looks set to rise again today after a solid night on Wall Street!
So, what's behind the sudden relief rally?
Share markets around the world suffered their worst start to a year in history this year, panicking investors into a selling spree.
But the latest growth figures from China – which had been the cause of much of the panic – suggest that the country isn't going as badly as first thought.
Sure, it's growing at its slowest pace in 25 years, but the growth figures were more or less in line with the government's expectations.
In other words, China didn't get the "hard landing" that some economists were fearing…
And then there was the sudden rebound in oil prices.
After hitting a 12-year low around US$27 a barrel, the resource bounced to more than US$32 – its strongest two-day rally since the Global Financial Crisis.
According to Bloomberg, analysts from Goldman Sachs are even calling for a new oil "bull market" before the year is out.
"Oil is going to rally into the spring", declared James Cordier, founder of Optionsellers.com, according to The Sydney Morning Herald, while Citigroup called it the "Trade of the Year".
The SMH further noted that Pierre Andurand, who correctly predicted the slump in oil prices, believes it will return to US$50 a barrel this year and US$70 a barrel in 2017.
Of course, there's nothing quite like a little bit of hope to drive the share prices of down-and-out shares higher.
For instance, BHP Billiton Limited (ASX: BHP), the market's punching bag, soared nearly 8% between Friday and Monday on the new bout of optimism.
Santos Ltd (ASX: STO) fared even better. It's up 19% since last Wednesday.
Can it last?
Investors have been right to avoid the energy sector over the last 18 months.
Oil prices have been stuck in a downwards spiral since mid-2014, shedding some 70% in that time.
But along the way, there have been brief rallies which were enough to lure some unsuspecting investors back into the sector.
And each time, those investors have paid the price.
This time looked to be no different. According to a report from CNBC, oil prices fell below US$30 again on Monday night before rallying 6% again on Tuesday.
Maybe it will hold up, or maybe it won't…
After all, for all the new 'oil bulls' out there, there are even more bears — some of whom are calling for a drop to just US$10 a barrel!
Predicting the future prices of commodities is inherently tricky, if not downright impossible, to do.
It's what makes investing in the resources sector so risky. If commodity prices fall, chances are your shares will too.
But there are signs that suggest there could be more pain in store…
The fact is, there is a serious supply rout in the oil market right now. On the one hand, global demand growth is slowing. On the other, US stockpiles continue to expand.
There is talk that OPEC could be willing to compromise on cutting production, but only if non-OPEC producers also cut theirs.
That could help alleviate the global glut of crude, but whether or not it actually happens is a different story…
Until then, some estimates suggest there is an excess of more than one million barrels per day being produced. The industry fundamentals remain weak and investors who buy in are running the risk of further losses.
Volatility Brings Opportunity
I'm not suggesting you should go out and buy any share when it falls.
Far from it!
Sometimes shares fall for a perfectly logical reason, and that statement applies to most shares in the energy sector right now.
When oil prices drop, the earnings of most producers will also take a hit.
Many, including BHP and Woodside Petroleum Limited (ASX: WPL), have been forced into huge impairment charges while others could be risking defaulting on their loans.
Their shares have fallen for a reason, and could continue to plunge. In my eyes, it would be foolish (lower case 'f') to risk much in the sector today.
But fears regarding falling oil prices have spread far beyond the realms of the energy sector itself.
Despite its rally in recent days, the ASX 200 is still sitting more than 5% lower since the beginning of the year, and nearly 17% off its 2015 high.
It's been volatile, for sure, prompting many investors to sell out of fear.
Some will vow to return when the market eases up again – perhaps when it's trading around 6,000 points again, like it was in early 2015 – while others will swear to never invest in shares again.
Both would be huge mistakes.
Firstly, the share market has historically been the greatest place to build your wealth for the long-term.
Sure, it experiences the odd setback, but volatility is the price you pay for greater returns.
Secondly, bull markets have a way of luring investors in. When shares have risen strongly, investors think they're destined to continue climbing with many buying in at exactly the wrong time.
The opposite holds true in a falling market.
As the market falls further, investors feel increasingly uneasy about what will happen next. Thus, they hold off from buying shares, even though it could be the best possible time to do so!
I'm not suggesting the market won't fall below its current level, and I'd never try to pick the exact bottom. After all, timing the market is a mug's game.
But ignoring any short-term movements, now could be an exceptional time to start buying shares for the long-run.
Take Advantage
Maybe you've had your eyes on a certain stock for a while and it's recently become cheaper to buy…
For instance, one company I've had my eye on is oOh!Media Ltd (ASX: OML).
As the leader in Out-Of-Home advertising in Australia, there's a good chance you've driven under one of this company's billboards on the way to work or the city.
You might have also been exposed to some of its digital signs whilst sitting at a cafe or waiting for your plane at their airport.
Its shares have already risen strongly over the last 12 months but as it continues to focus on growing its digital displays, it could be set for further gains in the future.
