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Buffet Buys, Chanos Says Sell: The Technical Verdict on Energy


One of the bigger news items recently affecting energy sector exchange traded funds was last week’s news that Warren Buffett’s Berkshire Hathaway (BRK-A) took a stake in Dow component Exxon Mobil (XOM), the largest U.S. oil company.

As not only the largest U.S. oil company, but one of the largest companies of any stripe in the world, Exxon is major holding in scores of energy ETFs including weights of over 20% in the Vanguard Energy ETF (VDE) , Fidelity MSCI Energy Index ETF (FENY) and the iShares Energy ETF (IYE) . [A Buffet Pop for Energy ETFs]

Another noteworthy investor, famed short-seller Jim Chanos, is bearish on national oil companies and major integrateds, like Exxon, calling the companies “value traps.” Chanos has previously sounded a bearish tone on Brazil’s state-controlled oil giant Petrobras (PBR), which qualifies as an integrated oil firm. Chanos also said he is short a broad swath of highly leveraged coal companies.

That says investors that want to do their best Chanos impression would do well to avoid the aforementioned oil ETFs as well as the Market Vectors Coal ETF (KOL) . For the risk-tolerant, the ProShares UltraShort Oil & Gas (DUG) could work as a “be like Chanos” ETF idea. [Leveraged ETFs: Useful, but Require Caution]

The technical outlook for energy sector ETFs could be implying that Chanos is wrong about big oil stocks, at least in the near-term.

The Energy Select Sector SPDR (XLE) , the largest energy ETF, “was in a four-week pause until rallying Nov. 14 (see Chart 1). It is now less than 4% below its all-time high, set in near the peak of the oil bubble in May 2008, when the commodity traded above $141 per barrel,” reports Michael Kahn for Barron’s.

Kahn goes on to note “Another positive is simply the rising trend itself. The ebb and flow of rally and pullback is orderly and the pullback seen over the past few weeks was quite shallow. This suggests the traders were not as interested in taking profits from the last rally leg. It is another sign of demand.”

XLE allocates a combined 30% of its weight to Exxon and Chevron (CVX), also an integrated oil company. The ETF is up 9% in the past 90 days. Of the four other oil and gas producers in XLE’s top-10 holdings, three do not have downstream operations, meaning they are not integrated firms.

Energy Select Sector SPDR

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.