Energy stocks as represented by the Energy Spider (XLE) have been moving in a more or less sideways direction since crude oil topped out in July and entered a bear market. I find it peculiar that energy stocks have consolidated at the same time that crude oil was crashing, but it does give us a clear sign of strength from that sector. Now I am seeing evidence that the correction in energy stocks is nearly over.

First, on the chart below we can see that crude oil is very oversold and is probably ready for a bounce. I would not care to speculate whether or not the bear market is over, but a 42% decline certainly entitles crude oil to a reaction rally or at least a correction. Either way, this would benefit energy stocks.


On the next chart the evidence is even more compelling. The Percent of PMO Crossover Buy Signals shows that the XLE stocks are very oversold in the short-term, and this condition happens to coincide with a medium-term oversold condition reflected by the Percent Buy Index, an alignment that implies that the expected rally should have staying power.


Bottom Line: I am not suggesting that we try to pick a bottom here, but the conditions are favorable for a good rally in energy stocks once prices begin moving upward enough to trigger a buy signal. I should point out that timing model performance on this sector has been marginal because of the sideways chop of the last year or so.

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Chip Anderson
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