Everyone is starting to take a look at oil names, and with good reason this time.
Back at the end of July I posted a quick thought on oil, arguing that we were starting to price in the oil industry’s secular headwinds. We had seen a sharp rise in the price of crude starting in mid-July, yet neither big oil or oil servicer names were following. At the same time, market analysis/chatter was that EVs were inevitable and would be on the market sooner than we thought.
Since then the performance gap between crude oil and oil stocks have continued their divergence.
The blue line is WTI, the burnt orange line is XLE, and the white line is OIH.
The upshot is that we have priced in a lot of secular headwind in a short period of time, investors, desperate not to lag the indices in a super bullish year marked by aggressive sector rotation, are likely to turn to the oil sector, as a laggard, to make up ground into year end.
And the charts are constructive.
Here is OIH, from one and 5 year perspectives:
Now, here is XLE, from the same perspectives:
It probably doesn’t matter for now that valuations are not attractive (i.e. oil names are pricing in a big earnings rebound) and that the secular headwinds haven’t gone away. And it probably doesn’t matter that late last week people already started recommending the sector.
What will likely matter most—unless crude oil ‘closes the divergence’ by itself taking a dive—is that people need performance, oil names have lagged crude sharply, and their chart patterns just turned up nicely.
So much for fundamentals and the efficient market hypothesis.
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