Morning Comment: Can Energy Stocks Finally Outperform?

  • Stocks a bit lower on higher oil prices, but the response if fairly benign so far.
  • Not everybody is so sure that the production will come back quickly…or that the situation will not escalate.
  • The Transports (led by the rails) should get hit pretty hard.
  • If oil prices stay elevated, it should help the energy stocks finally begin to outperform.
  • Since the energy stocks are very under-owned, the rally could be very, very strong.
  • The key resistance levels on the XLE energy ETF are the 200 DMA & the summer highs.

Stocks a bit lower on higher oil prices, but the response is fairly benign.

As you’ve all heard by now, crude oil is trading about 8%-10% higher on news that 5% of the global oil production has been shut down by the drone attacks on the Saudi oil fields. The reaction in other markets has actually not been very pronounced…as most global stock indexes (and the U.S. domestic futures) are only down about one half of one percent. Therefore, the global stock markets are pretty complacent about this development…and it seems like they think this is a problem that will only last a few days.

Listening to several experts on both crude oil and geopolitics, they don’t seem to quite as sure that this will be a one-off development. In fact, after saying that they could 1/3 to 1/2 of their production back on-line within days, Aramco is now saying this morning that they are “less optimistic on the pace of oil output recovery.”

Also, any belief that oil production can ramp back up quickly (and thus oil prices will drop back down) assumes that there are no further attacks…that the President (who is “locked and loaded”) does not respond militarily…and the situation does not escalate. We’re not saying that it definitely will escalate by any means, but with stock markets around the world coming off of very strong recent rallies (and an U.S. stock market that is within a whisker of record all-time highs), we’re a bit surprised that more investors are not pulling a few more chips off the table this morning.

Negative front page article on the railroad stocks in Barron's.

One group…as one general sector…that could/should see more downside movement today than the futures are indicating right now for the broad market are the railroad stocks and the Transports. The cover story in this past weekend’s Barron’s was a negative one on the railroads. They sighted increasing competition from truckers, but more important, they also sighted declining freight volume. So even though the railroad industry’s profits have risen in recent quarter due to cost-cutting, that earnings growth might not continue going forward……When you combine this with the jump in oil prices, the odds are pretty good that the DJ TRAN index will have a tough time breaking above the top-end of the sideways range it has been in for most of this year.

If under-owned stocks begin to run, the sky is the limit.

However, this weekend’s developments should certainly help the energy stocks. As we have sighted several times in recent weeks, the energy stocks are VERY under-owned…and they have been trading at a discount to the price of crude oil all year. Therefore, if (repeat, IF) this bounce in oil prices persists, this sector should outperform quite nicely for the rest of the year……Let’s face it, institutional investors are always looking for ways to improve their annual performance over the past few months of a year. This is usually a very tough goal to achieve, but if an important group or sector…that is very under-owned …starts to outperform in a meaningful way, it creates a great opportunity for those institutional investors (both those who are trying to play catch-up AND those trying to protect their gains). All of these institutional investors will have not choice but to jump on the bandwagon if this under-owned group (or any group) starts to fly higher in the second half of the year.

The key resistance levels for the XLE energy ETF.

Of course, this doesn’t guarantee anything. This situation might indeed die down very quickly…and oil prices could pull-back to where the have been for the past few months. This, in turn, would cause any near-term rally in the energy sector to be short-lived. However, if crude oil DOES stay elevated, we’ll be watching two resistance levels on the XLE energy ETF to see if the energy stocks will indeed begin to rocket higher. The first one is the 200 DMA (which stands at 62.84 right now). Back in the second half of 2018, this line provided nice support for the XLE. However, once it broke below that line in October, the group fell out of bed.

As the old (but great) saying goes in technical analysis, “old support becomes new resistance”…and sure enough the 200 DMA has indeed provided tough resistance for the XLE over the past six months (bumping up against is several times…but not breaking above it). Based on where the XLE is indicated in pre-market trading, it will break slightly above that 200 DMA this morning. A “slight break” will not confirm a we’ll need more upside follow-through in terms of both price and time before we can get too excited about the possibilities of a strong rally in the energy stocks.

However, the potential is certainly there…and that’s why we’ll also be looking at the $65 level as the next resistance level. Just below that level was the high for the XLE a couple of times in July. Therefore, if it can break above $65 in any meaningful way, it will not only take it well above its 200 DMA, but it will also give it its first “higher-high” of the year! In other words, any meaningful move above $65 would be a strong indication that an extended period of out-performance for the XLE was in the offing. (Charts below.)

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Matthew J. Maley

Managing Director

Chief Market Strategist

Miller Tabak + Co., LLC

Founder The Maley Report

275 Grove St. Suite 2-400

Newton, MA 02466


Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.

Posted to The Maley Report on Sep 16, 2019 — 8:09 AM
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