So far, 2022 is proving to be the year of the oil stocks.
The price of oil is up more than 20% over the past five weeks. At $92 per barrel, oil now trades at its highest price in over seven years…
And oil stocks have been on fire!
The Energy Select Sector Fund (XLE) – which holds a market basket of oil companies – is up more than 23% since the start of 2022. It’s up more than 53% over the past year.
And given the supply/demand pressures in the energy sector, oil and oil stocks are likely headed even higher in the months ahead.
But in the short term, they’re due for a pause.
Let me explain…
Regular readers might recall how we turned cautious on the energy sector last October. We weren’t outright bearish – just cautious.
Investor sentiment towards the energy stocks seemed too bullish for our comfort level.
And the Bullish Percent Index for the energy sector (BPENER) was at its highest level possible – meaning 100% of the stocks in the index were trading with positive technical patterns.
It’s not mathematically possible for the BPENER to get any better than that. So we figured if it can’t get any better, then it’s probably going to get worse… and suggested waiting a bit before buying the energy stocks.
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Then, XLE fell about 10% over the next two months.
Today, conditions in the energy sector are similar to where they were in October. The stocks have enjoyed a marvelous rally. Investor sentiment is quite bullish and the BPENER is up at 100.
So, it seems to me that now is a good time to be cautious on the energy stocks.
Here’s how the energy sector performed the last few times the BPENER hit 100…
In each case (blue arrows), a reading of 100 on the BPENER limited the immediate upside in the energy sector. And, it led to a pullback in the weeks that followed.
I suspect we’ll see something similar this time.
But, there’s no real urgency to jump into the energy sector right now.
We’ll likely have a better chance to put money to work in oil stocks at lower prices in the weeks ahead.
Best regards and good trading,
Jeff Clark
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