Time To Start Buying Energy Stocks? [ConocoPhillips, Chevron Corporation, Halliburton Company, Schlumberger Limited.]

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October 10, 2014 11:01am NYSE:ERX NYSE:ERY

energy independenceDan Hassey: WTI crude oil prices have dropped about 14% since their June peak, and natural gas is lower by about 40% since its February peak.


Energy stocks have mostly followed suit, and it’s clear some are in correction mode while others are in outright bear-market territory.

While many traders have been trying (and failing) to catch the bottom, if you read my short-term outlook for oil and natural gas, you knew oil was bearish and had not found a bottom. You also knew natural gas looked like it had found a bottom and that it’s been basing since July — a bullish view.

Although I wrote that I preferred natural gas to oil at this time, which remains true, that bet needs some more time to pay off. Most energy stocks are down, but not as much as natural gas.

And for energy investors, there’s beauty to be found in what some others may think is some ugly trading action.

As winter approaches and the end of the inventory build season approaches, let’s revisit the “commodities of winter” and with this comparative chart of a few of the ETFs that represent the energy sector …

 

The chart shows us that the SIG Oil Exploration & Production ETF (EPX), Market Vectors Oil Services ETF (OIH), SPDR S&P Oil & Gas Exploration & Production ETF (XOP), First Trust ISE-Revere Natural Gas ETF (FCG), iShares U.S. Energy ETF (IYE) and the Energy Select Sector SPDR (XLE) have trended downward in tandem for the past several months.

Half the ETFs are in technically in bear-market territory, down more than 20% each. The rest are in a correction phase, down more than 10%.

Below is a table with more information on the ETFs and indexes in the above chart:

 

Here are three key takeaways on the state of the energy sector …

• The First Trust ISE-Revere Natural Gas ETF (NYSEARCA:FCG), a natural gas exploration & production ETF, is down the most, about 29%.

• The iShares U.S. Energy ETF (NYSEARCA:IYE) is down the least because it is the most-diverse — consisting of all the industries in the energy sector (E&P, integrateds, service, equipment, refiners and pipelines).

• The Energy Select Sector SPDR ETF (NYSEARCA:XLE) has the advantage of size. That’s because the larger energy companies in this ETF are much bigger and more stable than those in some of the other ETFs. Generally these companies have more shares outstanding, which makes it harder to move them up and down than smaller stocks with fewer outstanding shares. XLE is also the largest of the energy ETFs listed, with more than $11 billion in assets.

Bottom line: The energy markets are oversold and undervalued.

Why Natural Gas Has the Kind of Chart I Like to See

Oil and natural gas — and, in turn, energy stocks and ETFs — may be close to finding a bottom. Once that happens, they aren’t out of the woods quite yet. That’s because prices then need to trade sideways for a while (i.e., “basing” ).

Below is a chart of natural gas. This is the chart we would like to see for energy stocks:

Natural stocks should be the first stocks to find a bottom and then base.

Part of the reason why they aren’t acting like natural gas is because there aren’t any pure natural gas companies. Most E&P companies produce oil and have oil and natural gas liquid (NGLs) reserves.

During the cold winter in early 2014, natural gas spiked to $6.50 in February. Natural gas spiked to $6.50 during the cold winter. Prices fell and found a bottom in July.

From that time on, prices have based. We need to see the same thing happen for energy stocks. Prices rarely make a “V” when they fall this much. Once they find a bottom, they tend to base (i.e., trade sideways). This should give us time to position ourselves for the winter.

When the basing starts, I will let you know when it’s time to start buying energy stocks again. For now, this is a time to keep a close eye on the charts … and keep some powder dry … for the opportunities the upcoming heating season will bring.

dan-hasseyThis article is brought to you courtesy of Dan Hassey

Uncommon Wisdom Daily is a free daily investment newsletter published by Weiss Research, Inc. This publication does not provide individual, customized investment or trading advice. All information is based upon data whose accuracy is deemed reliable, but not guaranteed. Performance returns cited are derived from our best estimates, but hypothetical as we do not track actual prices of customer purchases and sales. We cannot guarantee the accuracy of third party advertisements or sponsors, and these ads do not necessarily express the viewpoints of Uncommon Wisdom Daily or its editors.


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