Is There a Bounce Opportunity in the Energy Sector?

Oil has corrected sharply. And so have the majority of commodity markets. But in contrast to the financial sector which has the news in a headlock, the energy sector is not only being mostly ignored, it actually presents exhaustive selling and is setting up a pattern which has seen it bounce higher.

This is a chart of the bullish percent index for the S&P Energy Sector:

After Wednesday’s close the bullish percent closed up but on Tuesday, there were less than 6% of the component stock showing a buy signal according to point and figure charting. This is a sign of extreme exhaustion within the group and as you can see, it has presaged some important inflection points. The lower the bullish percent, the more powerful wave of selling that hit the sector. If anything, right now I would play this group as a whole (through an ETF like XLE) or components like Valero (VLO), Chevron (CVX) and Halliburton (HAL) for a bounce.

The last time this happened was in January 2008 when immediately after, the whole sector bounced back with a vengeance. Of course, in these situations, one has to be mindful whether it is more of the same or a whole new ball game. That is to say, if we are seeing yet another correction within a secular bull market, or whether the major trend has changed and the “oil bubble” has been pricked.

But I would argue that at this junction, if any sector is in “washout” mode, it is the energy sector and not the beleaguered financials. At least they aren’t there quite yet - although there is a lot of wailing and gnashing of teeth.

Comments

[crimfunk:]

no. Crack spread dropped 20% and crude is in backwardation. Refiner utilization is in the mid 70s what will happen to refiners when it gets to the mid 80s?

2008 Sep 18 12:35 PM

[crimfunk:]

I do like the E&Ps DVN, XTO, XEC, APC

2008 Sep 18 12:36 PM

[AlexS:]

Agreed. A lot of these stocks are selling at P/Es or 5-10. And although crack spreads are down they're still positive and oil is still up compared to a year ago. What, do they think now that people can live without energy? The biggest negative for these stocks is Obama and the Dems and all their plans to bleed the energy companies with higher taxes.

2008 Sep 18 12:53 PM

[G. L. Turner:]

Why do the dimwitted Republicans think Obama and the Dems are going to tax the Oil companies to death..give me a break...What they will do is remove the give away tax the Bushie Boy insisted they have in 2005 'for developing alternative' fuels/sources of energy - that THEY HAVEN"T DONE...The oil companies make reasonable normal profits, based on returns on sales, but they just rake in so much money based on volume but it seems obscene.

2008 Sep 19 12:29 AM

[rcraig:]

What do you expect when all the CEO's are playing catch up with Bill Gates and Warren Buffet. When all the money the compaies make goes to salaries and compensations you expect the numbers to look a little odd.
What needs to take place is a freeze on executive saleries until the financial mess is cleared up. This is a little extreme but an action that needs to be done to flush the good old boy network out of the market and allow reasonalble people run the companies.
The other thing the government can do for the economy is freeze the use to automatic computer generated trades.
With all the profits the oil companies are making they could create or manipulate an alternate energy source to complement the auto indutry without skipping a beat in the economy.

2008 Sep 22 06:05 PM

[The Pickpocket:]

Is There a Bounce Opportunity in the Energy Sector?
Ah...... No....

Dude, you are so freaking wrong I dont care what the charts say... Europe is going to get pounded next with China, Russia and Brasil ready to get destroyed.. You are looking at deflation if we are lucky.. You'll get your bounce if you are looking at hyperinflation which will happen at the end. To repeat... we are headed to a global recession/depression/d... which will kill all commodities... You can play the back side but the smart money is on the short sell on the rallies which we have been doing since 130.00 by buying back month put spreads and selling calls up top

I wish you the best of luck

2008 Oct 02 11:44 PM

[tg-2009:]

What if oil will go down to $60-$70 ? Don't believe energy is bottom yet.

2008 Oct 11 11:48 AM

[Ghostdog:]

You are right TG. But dont even think that is the bottom. A case can be made that we will see 30 bucks and even 10 (maybe thats a bit hyperbolic) but its different this time. Oh and by the way. Since Oct 2, my last post. we are done 20 bucks.. so much for that bounce.

2008 Oct 15 03:51 PM

[Ghostdog:]

Why no response Babak? You like to hide when you are dead wrong?

2008 Dec 27 11:00 AM

[Bounce Energy:]

This just happens to be one of the worst predictions on what energy was going to do that I have seen on the net so far. The graph really ads to the effect of how bad a prediction this was. A commodities broker actually tried to talk me in to buying a natural gas contract around the time energy tanked saying it was just a pull back but I was not buying it at all. Unbelievable what the "energy experts" would have you believe at times. I am just glad I was not suckered into anything.

Jan 26 04:46 PM