Time to Invest in Energy Stocks?

Keris Lahiff  of CNBC reports, Energy stocks are about to catch up to the crude rally in a big way, says market watcher:

Energy stocks are still negative for 2018 even as crude oil has gained 11 percent. One market technician expects the sector to play catch-up as we head deeper into the year.

"The divergence between what we're seeing with crude oil and the XLE, this is a divergence that is clearly going to close," Craig Johnson, chief market technician at Piper Jaffray, said Thursday on CNBC's "Trading Nation."

The XLE energy ETF (XLE) has fallen more than 1 percent this year, failing to join in on crude oil's rally. It tumbled nearly 11 percent in February, its worst month since December 2015, while crude oil fell just 5 percent.

Energy has made a comeback since those lows. It posted gains in March and is on track to become the best performer on the S&P 500 in April. The S&P 500 energy sector has added 6 percent this month.

Even with those gains, Johnson says fear remains following years of underperformance.

"Most places are underweight the energy play. They've been burned by it, they haven't wanted to come back to it yet," he said.

But Johnson and his team are bullish on the sector and expect more upside this year.

"We're overweight the sector at this point in time," said Johnson. "If we're going to get any sort of pullback, a shakeout (a deeper pullback and shakeout, I should say) in the broader market I think energy is probably a space that some of that money is going to rotate into, given how weak the performance has been so far this year."

To Chad Morganlander, portfolio manager at Washington Crossing Advisors, the energy sector doesn't look quite as good. A possible weakening in Chinese demand and growing domestic supply could unbalance oil and hit energy names, he said.

"China growth has actually been one of the critical contributors to demand for oil," he said. "Any type of reset there within policy for credit growth is going to have this wash-back effect on demand for oil."

"Secondarily, you do have the United States which is actually going to become in our estimates over the next five years the largest producer of oil and they're not directed by OPEC," he added.

U.S. crude oil exports moved north of 2 million barrels per day at the end of March, its highest level on record. Analysts expect that supply to grow this year with the U.S. possibly overtaking Saudi Arabia and Russia as the world's largest producer.

"We're neutral on the sector to underweight," said Morganlander. "We would be much more cautious on this sector overall going forward."

The XLE ETF surged more than 1 percent on Friday afternoon, while West Texas Intermediate crude oil prices gained 0.6 percent to trade at roughly $67.50 a barrel.

It's Monday, have energy on my mind so I wanted to write a brief comment on it. A lot of analysts are talking about the disconnect between oil prices and oil stocks, most predicting it will converge higher.

Gluskin Sheff chief economist and strategist David Rosenberg says that while Canada faces huge economic obstacles – including trade uncertainty, heavy debt and an “uncompetitive tax regime” – the Toronto Stock Exchange is now host to some of the most attractively priced stocks in the world, offering 'mouth-watering' discounts.

I like Rosie, think he's a very smart guy but Canadian stocks just don't tickle my fancy. I remain structurally short Canada and think we're in for a long, dark period ahead.

Still, some smart people I talk with on this blog, like HOOPP's Jim Keohane, have told me they like Canadian energy shares over the long run and find them very reasonably priced at these levels.

Interestingly, the Canadian currency (FXC) and Canadian energy shares (XEG.TO) popped recently which supports the case that maybe Canadian shares are cheap here (click on images):

Similarly, US energy shares (XLE), oil exploration shares (XOP) and oil service stocks (OIH) have also all popped recently, mostly owing to geopolitical tensions in Syria (click on images):

If you look at these charts, you have to wonder whether there is more upside in energy shares.

Earlier today, I called my favorite stock trader, Fred Lecoq, to talk stocks. Fred used to manage Canadian equities at PSP at the time I was there and is now retired managing his own money.

"So Fred, last week Bob Pisani of CNBC was saying how some energy stocks like Hess Corporation  (HES) and Valero Energy (VLO) have been leading the energy sector. I know Paul Singer's Elliott owns a huge chunk of Hess and energy shares have done very well lately. What do you think?"

Fred replied: "Tell Bob Pisani to have a closer look at Anadarko Petroleum corporation (APC) which has made a very nice move this year and is now at its 200-week moving average" (click on image):

I told him the daily chart on Anadarko looks a bit overbought and the weekly looks nice but I would short it if it pops over its 200-week. I also told him that I hate energy shares this late in the cycle and think these are just countertrend rallies in a downtrend channel.

Fred told me: "That's good that you hate energy. Everybody hates energy now which typically bodes well for this sector."

Still unconvinced, I then told him energy has popped because of geopolitical tensions and the very weak US dollar (UUP), both of which have helped energy shares. "Going forward, I see a second half global slowdown, a rally in US long bonds (TLT) and a rally in the US dollar, so from a fundamental view, it's just hard for me to warm up to energy stocks."

Fred agreed but said "that's what makes a market" and added, "a lot of people are betting against energy shares and yet they keep inching higher." He also shared with me a nice presentation from Raymond James's Energy Group which is pretty bullish on oil and energy stocks.

Still, I'm highly skeptical, see the latest rally in energy stocks rallying as nothing more than short covering and a countertrend rally due to geopolitical tensions and a weak US dollar. No doubt, there are excellent countertrend rallies in energy shares but I wouldn't overstay my welcome in this sector.

Below, a quick snapshot of energy stocks that rallied on Monday from my Energy watchlist (click on image):

One other name on this list I didn't mention above which Bob Pisani did mention is ConocoPhillips (COP) whose shares are up nicely this year in a very bullish chart (click on image):

This is a past favorite of Warren Buffett and while I don't know if Berkshire is buying now, I did a quick scan to see which funds increased their stake in Q4 and saw Steve Cohen's Point72 upped its stake considerably (click on image):

Whatever you do, don't chase shares here, wait for a nice pullback which admittedly may or may not happen (it can just keep creeping higher).

As far as energy shares (XLE),  I remain cautious despite a weekly chart that looks fine and is actually mildly bullish (click on image):

Others are a lot more bullish on energy shares. Below, one market technician expects the sector to play catch-up as we head deeper into the year.

"The divergence between what we're seeing with crude oil and the XLE, this is a divergence that is clearly going to close," Craig Johnson, chief market technician at Piper Jaffray, said Thursday on CNBC's "Trading Nation."