How to Play the Next Bull Market in Energy

With the S&P 500 index having fallen 40% from its peak, it's time to prepare for the next bull market in the best-performing industry this decade: energy.

The previous bull market started in mid-2003, and China and India were hot topics. As China and India, sometimes referred to as "Chindia," are home to a third of the world's population, it was likely that oil prices would rise as those nations' economies boomed. That's exactly what happened.

With that sort of backdrop, it made sense to aggressively build up positions in the energy, natural resources and mining sector. In 2003, energy comprised about 9% of the S&P 500. I went overweight at 12%. I bought British Petroleum(BP), Chinese refiner Sinopec(SNP), exploration and production company Murphy Oil(MUR) and Statoil(STO), the big oil company of Norway. Each was weighted at 3%.

As oil prices climbed, I made changes. First, in March 2005, I swapped Murphy Oil for Marathon Oil(MRO) because it was less volatile, as it was a refiner with gas stations and had a generous dividend. In May 2006, oil made its first run up to $75, so I reduced Statoil by about 25%. Later that year, I sold British Petroleum and bought the WisdomTree International Energy Fund(DKA). The energy investing theme had been several years old, and the risk-to-reward ratio of holding individual stocks became less compelling.

As energy kept rallying, the industry came to have a larger weighting in my portfolio, so I sold Sinopec in 2007. In May 2008, I sold some more Statoil, when times were still good for oil, dumped Marathon as the bear was starting to bite and finally bought a little Statoil a couple of months before the price of crude bottomed. Today, I only own the WisdomTree International Energy Fund and Statoil, leaving me underweight in the sector.