Hit the Gas and Play Catch Up with XLE

The selloff in energy stocks is a temporary disconnect that puts XLE at a good entry price

   

There’s been a big breakout in the price of oil over the past couple of trading sessions, and that’s taken the price of West Texas Crude to its highest level in more than two months.

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The chart here of WTI Crude shows the recent move higher above the short-term, 50-day moving average. This metric is very close to its 200-day moving average of $92.21, and as of this writing we’ve seen the fund up 2.36% midway through Thursday trade.

Interestingly, while WTI Crude has broken out over the past week, we’ve seen a curious selloff in the price of related energy sector stocks. These stocks have fallen over the past several trading sessions, including a 1% drop midway through Thursday trade.

The second chart of the most representative exchange-traded fund (ETF) in the space, the Energy Select Sector SPDR (NYSE:XLE), shows that this fund actually has fallen below its 50-day average.

XLE is populated with the some of the industry’s largest names, including Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX) and Schlumberger (NYSE:SLB) and many others. These stocks should be doing better given the recent climb in oil prices. They also should be doing better given their status as macro-sensitive sectors.

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Over the past few weeks, we’ve seen other macro-sensitive sectors such as materials and industrials move higher on upbeat data out of China and Europe, but energy stocks have been the exception. This trend lower is despite the normally bullish driver of higher crude and higher gasoline prices.

I suspect that the current selling in energy stocks like the kind found in XLE will be a temporary disconnect for traders, and when the money flows back into the space you will likely be happy if you get in on this trade now.

Recommendation: I think you can enter into XLE at the market here at just over $70.50, and expect the shares to jump another 10% higher from here to over $77 by the end of January. Of course, you never want to enter a trade without knowing when you’ll sell if things don’t go your way, so protect yourself with a stop-loss of about 7-8% below your official buy price.

As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.


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