Buyer Beware: Oil Stocks Headed for a Correction

Includes: BP, COP, CVX, XLE, XOM
by: Dan Carty

Much has been said about the strength of the oil stocks of late, even in the face of a weak crude market. Generally, this type of divergence does not occur as the chart shows. There have been three instances on this chart where the Oil SPDR (NYSEARCA:XLE) has outperformed crude since 1999.

In each instance, the following months saw a correction of the XLE in varying amounts. It makes you wonder if the buyers of energy stocks are blindly ignoring this at the moment.

Interestingly enough, I had argued that the fundamentals support a bounce in crude when in fact the bounce occurred in the energy stocks. Go figure. Anyhow, I believe the energy stocks have become too stretched here and should migrate back towards the crude barrel.

And a quick note on natural gas prices. Thursday's report was bullish in my opinion but perhaps the cold weather trade, combined with the fact that we are stalled at the $8 resistance, has traders taking profits. I avoided the complex last week after getting buried on a short but look to re-enter sometime soon.

Related Stocks: Chevron (NYSE:CVX), ExxonMobil (NYSE:XOM), BP (NYSE:BP), ConocoPhillips (NYSE:COP)

XLE vs. WTIC 7-yr chart:

Crude Oil Prices