BP Story Should Put Investors on Defensive Mode

The BP leak has trumped every other story or influence on the markets right now, and should be changing the way you are trading and investing.
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NEW YORK (TheStreet) -- The BP (BP) - Get Report leak at the deepwater horizon rig has trumped every other story or influence on the markets right now, and should be changing the way you are trading and investing.

Totally out shadowing the European debt crisis and Chinese growth figures, the continuing spew of oil into the Gulf of Mexico has entirely captured the imagination of the investing public, placing a pall over the markets that will be difficult to break out of until that leak is controlled. I have begun calling this the "BP malaise" -- it is the only story that matters right now to the markets.

It is not only that the BP oil spill has now been classified as the biggest environmental disaster in U.S. history that has investors acting like a deer caught in the headlights. And it isn't even the continuing flood of pictures from the Gulf coast showing the increasing spill size and its effects on fishing, farming, resort areas and even the energy business itself, slowed to a crawl by the Obama administration. It has been the maddeningly addictive live feed of the BP cameras of that broken riser pipe, 50 miles off the coast of Louisiana and one mile down, that has seemed to mesmerize the public.

I know it has mesmerized me. Something about the continuing video of that seemingly endless spew has had such a depressing and hopeless effect, it seems, on all of us. And knowing now that this video will be with us daily, probably at least until August, has made it difficult for me to be optimistic about the market and my investments everywhere, not only in the oil sector that I concentrate on.

And we are learning that we may not even get relief from this disaster in August. Yesterday, the president-elect of the American Association of Petroleum Geologists, David Rensink, said that BP would need the equivalent of a 'lottery win' to correctly intersect the runaway well with its relief well on the first try. In a similar maneuver to stop a leaking well in the Timor Sea last year, PTT Exploration & Production Plc used a relief well to finally cap the flow after 10 weeks -- but only on their fourth attempt.

The logistics of such an operation make it clear just how tough this maneuver is: In essence you are drilling a mile underwater at tremendous pressures not encountered even in an Apollo mission, trying to intersect a 9-inch area of pipe with another 9-inch area of pipe. Most engineers agree that a relief well will ultimately end the leaking well, but are not in as much agreement as to how long it will take to get an operating relief well in place. August seems like an optimistic forecast right now.

The BP malaise, therefore, will be with us for at least the next two and a half months. What can we do to adjust our investments in light of this continuing anchor on stocks?

Two words: play defense. I think we will be looking at a flat to down trending market until the BP leak is capped, and defense requires keeping a tight leash on your investments and preparing for opportunities that a bearish market delivers. Getting into defensive mode requires making three disciplined moves.

First, you need to look with a jaundiced eye at every holding in your portfolio, jettisoning those that are not performing and raising a bit more cash than you're normally accustomed to having. Second is centering on those stocks that you are sure you can hang on to in times of trouble -- these are the dividend payers and consumer staples stocks. Third is the most disciplined step: setting levels for those stocks beforehand and sticking with your strategy. Too often a big move will shake your conviction on a stock or a strategy and cause you to make too many moves and too many mistakes. Instead, put four or five stocks on your radar that you want to buy as solid defensive plays, decide the levels and the amounts you are willing to invest and stick to that plan.

The BP malaise will be with this market at least until August. It promises to be a very difficult summer for investing. Be ready for it by making a defensive plan of investing and sticking to it.

At the time of publication, Dicker owned BP.

Dan Dicker has been a floor trader at the New York Mercantile Exchange with more than 20 years' experience. He is a licensed commodities trade adviser. Dan's recognized energy market expertise includes active trading in crude oil, natural gas, unleaded gasoline and heating oil futures contracts; fundamental analysis including supply and demand statistics (DOE, EIA), CFTC trade reportage, volume and open interest; technical analysis including trend analysis, stochastics, Bollinger Bands, Elliot Wave theory, bar and tick charting and Japanese candlesticks; and trading expertise in outright, intermarket and intramarket spreads and cracks.

Dan also designed and supervised the introduction of the new Nymex PJM electricity futures contract, launched in April 2003, which cleared more than 600,000 contracts last year alone. Its launch has been the basis of Nymex's resurgence in the clearing of power market contracts over the last three years.

Dan Dicker has appeared as an energy analyst since 2002 with all the major financial news networks. He has lent his expertise in hundreds of live radio and television broadcasts as an analyst of the oil markets on CNBC, Bloomberg US and UK and CNNfn. Dan is the author of many energy articles published in Nymex and other trade journals.

Dan obtained a bachelor of arts degree from the State University of New York at Stony Brook in 1982.