Energy—the biggest underperformer in the S&P 500 sectors so far this year—has started to show some signs that oil and gas stocks may be close to breaking out of the downward trend.
The selloff in energy stocks and energy-tracking funds may have been overdone, says Jonas Elmerraji, senior market analyst at Baltimore-based Agora Financial and a contributor to TheStreet.
The SPDR S&P Oil & Gas Exploration & Production (XOP) exchange-traded fund broke out this week of a downward trend that had seen the ETF lose 30 percent between April and the end of August. The relative strength index (RSI)—the momentum indicator—of the past 14 days broke out of its own downward bear range at the beginning of September, signaling that XOP could be at the beginning of an upward trend, Elmerraji argues.
However, XOP—which closed at US$23.74 on September 11—could return on the downward path if it breaks below the previous low of US$21, Elmerraji says.
The XOP exchange-traded fund is just one of many funds tracking energy stocks—it includes oil and gas exploration and production stocks.
In the first week of September, several other energy ETFs gained momentum on the back of rising oil prices last week, according to Zacks Investment Research. Those are VanEck Vectors Oil Services ETF, SPDR S&P Oil & Gas Equipment & Services ETF, iShares U.S. Oil Equipment & Services ETF, Invesco Dynamic Oil & Gas Services ETF, and Invesco Dynamic Energy Exploration & Production ETF.
However, the rise in oil prices could be short-lived, according to Zacks. Recent geopolitical developments also point to potentially lower prices, especially with the rumored softer U.S. stance on Iran after the ousting of war hawk John Bolton as National Security Advisor earlier this week.
Global oil demand growth is also weakening, which led to OPEC and EIA downgrading their respective demand outlooks for this year.
Oil stocks have underperformed range-bound oil prices this year, yet some analysts believe that the oversold energy sector could start to recover, even if the prices of oil and gas don’t move up too much.
The oil price slump in the fourth quarter of 2018 and the investors’ now finite patience with shale producers not turning in cash flows have combined to punish the stocks of many big and small U.S. oil drillers in recent months.
Energy has been the least winning sector in the S&P 500 this year, and analysts say that it has also been the least loved by investors.
According to Yardeni Research, Inc, the energy sector has gained 5.4 percent year to date to September 11, compared with a 19.7-percent increase in the S&P 500 index. Energy was the worst performer among the major sectors in the S&P 500.
While the S&P is up 19.7 percent year to date, as of close on September 11, the SPDR S&P Oil & Gas Exploration & Production EFT was down 10.52 percent year to date.
Volatile oil and gas prices, sudden price slumps, and concerns about future oil demand have combined over the past year or two to make investors shun oil and gas stocks, which have been the worst performers as a sector in recent months.
Yet, despite the apparent Wall Street snub, Wall Street sell-side analysts and stocks experts are not convinced that the energy sector is done for good.
If the early sign of breakout of one ETF tracking energy stocks turns into an uptrend, it could signal that there could still be value in oil and gas stock investment.
By Tsvetana Paraskova for Oilprice.com
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