You’ve surely heard it said ‘’what comes around, goes around," as a way of characterizing an inevitable and almost kharmic outcome.
Right now, as the grip of winter fully takes hold, an example of this cosmic zen is currently unfolding in the financial markets; specifically between the price of crude oil and the performance of the overall energy sector.
In short, after traveling in lockstep for the better part of two years, MKM Partners’ chief market technician Jonathan Krinksky explains in the attached video that it’s time for these two cousins, so to speak, to restore their normal relationship.
What that means is that it’s time to get long oil via the U.S. Oil fund (USO) and short energy companies via the Energy Select SPDR ETF (XLE).
“It’s purely a technical call,” Krinksy says, noting that the long-term relationship between crude and energy stocks is historically pretty high.
“But over the past couple months, that’s really broken down,” he says, noting the near $20-per-barrel slump in crude prices we’ve seen since September. In fact, his works shows that the normally synchronous relationship between crude and energy has slumped below 40%, and is at a three-year low.
“We’re looking for a reversion to the mean,” Krinsky says, “where crude would rally up and energy stocks would pull back.”
He says in the past five years, whenever you’ve seen a correlation break down like this, it inevitably return to its long-term trend.
“It’s really a call on what history tells us,” he summarizes, rather than a prediction on oil prices or fracking or the Middle East or any of the typical drivers that impact the energy sector.
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