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An Oil ETF With Considerable Upside Potential


Equity-based energy sector exchange traded funds started some favorable seasonal trends early last month.

Historically, the late February through May time frame is kind to energy stocks and ETFs, but that seasonality started a bit early this year as the energy sector was the best in the S&P 500 last month with a gain of almost 4.6%, according to S&P Capital IQ data.

The Energy Select Sector SPDR (XLE) , the largest energy ETF by assets, is usually the best of the nine sector SPDR ETFs in February. That was not the case this year, but XLE’s impressive 7% gain was good enough to place the ETF third among the nine SPDRs last month.

The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) is another energy ETF investors should monitor in the near-term.

“The Oil patch has been struggling over the past few months, as compared to the S&P 500, as well as on an absolute return basis. Digging deeper though, we are seeing signs of improving relative strength in the drillers and exploration & production plays,” according to Captain John Charts.

Captain John Charts points out that XOP’s relative strength has recently been improving. Good news considering the seasonal trends that are starting to kick in. Over the past 20 years, the sector has posted gains 60% of the time February with that number jumping to 70% in March and 75% in April, according to Equity Clock.

XOP is an equal weight ETF and, in a departure from cap-weighted equivalents, Exxon Mobil (XOM) and Chevron (CVX) are not among XOP’s top-10 holdings. In fact, integrated oil stocks represent just 5% of the ETF’s weight and that’s important because the aforementioned seasonality is most efficacious to exploration and production and oil services names. [Buy Now: Energy ETFs]

“Here is the Daily price chart. XOP was stuck inside the parallel green channel late last year before finally breaking out last month! Often times, a breakout will include a pullback to the breakout point (also know as a test) before continuing on,” according to Captain John Charts.

Chart Courtesy: Captain John Charts

The bullish outlook for XOP comes with the ETF just 5.4% below its 52-week and after the fund surged 8.8% last month. Investors are noticing. On Feb. 21, XOP had $959 million in assets under management. As of Feb. 27, that number was up to $1.15 billion, according to State Street data.