Written by Lance Roberts, Clarity Financial
I have been discussing over the last couple of weeks, that oil prices had broken important supports at $48, then $45, and hit our target of the low $40’s. With oil prices extremely oversold, it is not surprising to see a bounce this past week as shown in the chart below:
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However, despite the sharp rally in oil prices of 8%ish, energy stocks ($XLE) failed to gain much traction by rising roughly 2% from recent lows.
As I noted in last week’s sector breakdown:
“The OPEC oil cut has likely run the majority of its course and with Permian Basin production on the rise, the pressure on oil prices from supply/demand imbalances remains an issue. I discussed the headwinds to oil prices in May of this year as oil prices approached $50/bbl.
While investors have chased energy stocks on expectations of minor production cuts from OPEC, little has been done to resolve the fundamental valuation problems which face a majority of these companies, and investors have paid the price as of late. Which is why I had suggested selling energy stocks in November of last year as noted below.”
“Importantly, note the weekly ‘sell signal’ (vertical dashed red line) at very high levels currently for oil. While there is hope the production cuts will lift oil prices in the short-term, the longer-term technical backdrop suggests a bigger correction may already be in the works.”
Over the last few months, I have repeatedly suggested allocation models that energy exposure should be severely reduced or eliminated entirely. That has been profitable advice since then.
However, as I did note last week:
“The energy sector remains in a negative trend but has now reached extremely oversold levels along with oil prices. Any rally in oil prices that fails to climb above $48/bbl should be ‘faded’ and energy exposure reduced to extreme underweight in portfolios for the time being. There will come a time for owning energy-related equities, it just isn’t right now.”
Outside of a short-term trading opportunity, that advice remains salient this week for longer-term investors.
