Buyer Beware: Oil Stocks Headed for a Correction

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 (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 (CVX), ExxonMobil (XOM), BP (BP), ConocoPhillips (COP)

XLE vs. WTIC 7-yr chart:

Comments

[kkin365:]

Good chart, but it is above my understanding. If oil stocks are out of line relative to XLE, why it was XLE's role to adjust? omooc

2006 Oct 30 09:02 AM

[Dan Carty:]

Hello David, the two tend to follow each other closely. Since I was bearish on crude, I believe that the XLE is out of line. Thus, it should return to the other or the mean of the two so to speak. I making an overvaluation call of one vs the other. Thanks...Dan

2006 Nov 15 09:59 PM

[Barry Gitarts:]

how do you know oil stocks don't lead oil?

2006 Oct 30 11:11 AM

[Dan Carty:]

Hello Barry, on the chart, each time stocks have led oil, they have corrected back when crude did not follow. Perhaps this time is different...thanks for the comment...Dan

2006 Nov 15 10:00 PM