It’s a Little Too Early to Buy Into the Energy Sector

Don’t rush to buy into the energy sector just yet. Oil stocks have farther to fall.

The Energy Select Sector Fund (XLE) is down nearly 6% over the past month. It is one of the worst-performing sectors for May. As a result, bargain hunters are looking to buy.

But it’s too soon.

Still on a Sell Signal

The Bullish Percent Index for the Energy Sector generated a sell signal in late-April when it turned lower from overbought conditions. At the time, the financial media talking heads were universally bullish on the energy sector. Oil was trading for more than $80 per barrel. And the talking heads argued that oil companies were “printing money.” They recommended buying the oil stocks.

We argued the other side. BPENER buy and sell signals have an excellent track record. So, we suggested patient investors would get a better buying opportunity a few months down the road.

It has only been one month. The XLE is 6% lower. That already qualifies as a better buying opportunity. But, let’s stay patient… the opportunity is likely to get even better.

Here’s an updated look at the BPENER…

A bullish percent index (BPI) measures the percentage of stocks in a sector that are trading with bullish technical patterns. It’s designed to measure overbought and oversold conditions.

An index is overbought when it registers above 80 – meaning 80% of the stocks in the sector are trading with bullish patterns. An index is oversold when it drops below 30.

The blue arrows on the chart point to when the BPENER rallied above 80 and then turned lower from overbought conditions. That action generates a BPENER sell signal. Usually, it’s a good idea to avoid owning energy stocks in this situation.

We’ve had three previous BPENER sell signals over the past two years. Energy stocks sold off hard following all three of those signals. The 6% decline we’ve seen in the energy sector over the past month would be the mildest of all of those declines.

There’s Still Room to Fall

Notice also that following the sell signals in 2022, the BPENER dropped below 5 – meaning that only 5% of the stocks in the energy sector were trading with bullish technical patterns. The sell signal last September pushed the BPENER below 40 before it stopped declining.

The BPENER closed Wednesday at 59. That’s closer to overbought than it is to oversold. It suggests that energy stocks still have plenty of room to fall farther.

Traders don’t need to rush to buy into the energy sector right now. Stay patient. We’ll have a better chance to buy a few weeks from now.

Best regards and good trading,

Jeff Clark
Editor, Market Minute