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A Bold Call on Energy ETFs

This article was originally published on ETFTrends.com.

The Energy Select Sector SPDR (XLE) , the largest equity-based energy exchange traded fund, entered Monday with a fourth-quarter loss of about 12%, but some market observers believe the energy sector is poised to rebound.

Last week, oil exchanged-traded funds (ETFs) gained after lengthy Organization of the Petroleum Exporting Countries (OPEC) discussions finally came to a conclusion, resulting in a larger-than-expected production cut that sent oil prices higher on Friday.

OPEC and associated partners agreed to cut 1.2 million barrels per day with OPEC being responsible for 800,000 barrels. The latest production cut came as a surprise to many oil analysts as initial estimates were slated at 1 million barrels per day and 650,000 barrels per day for OPEC.

“We're overweight the energy sector at this point in time for one simple reason: It looks like a lot of the bad news is largely baked in,” said Craig Johnson, chief market technician at Piper Jaffray, in an interview with CNBC. “When you look at the decline in the oil price that we had seen and when you look at the XLE chart, you saw [the] oil price fall at a much faster pace than what you saw the stocks fall.”

Encouraging Signs

During oil's recent slide, XLE and other basic energy ETFs performed significantly less poorly than the underlying commodity. Additionally, there are signs of life on XLE's charts.

“The XLE chart has come right back to clear identifiable support and you're getting a positive divergence on the RSI so at this point in time it's better to be buying the XLE in here than selling it, and that's what we've been telling our clients,” said Johnson in the CNBC interview.

XLE and other traditional cap-weighted energy ETFs are typically heavily allocated to Exxon Mobil (XOM) and Chevron (CVX). Those stocks combine for over 37% of XLE’s roster.

Rivals to XLE include the Vanguard Energy ETF (VDE), iShares U.S. Energy ETF (IYE) and the Fidelity MSCI Energy Index ETF (FENY) .

“The XLE hit its most oversold level in four years in October as its relative strength index tumbled to 18. Any RSI reading below 30 typically suggests oversold conditions,” according to CNBC.

For more information on the oil market, visit our energy category.

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