Energy stocks are finally catching up to oil as its rally extends through a second week. One chart watcher sees this as its moment for a big break out.
“This divergence that developed a couple of months ago should resolve itself rather quickly with a nice strong rally, a continued rally in the energy stocks,” Matt Maley, equity strategist at Miller Tabak, said Tuesday in an appearance on CNBC’s “Trading Nation.”
Crude has rallied more than 10 percent so far this year, including a nearly 2 percent rise on Wednesday that pushed West Texas Intermediate to its highest level since December 2014.
Meanwhile, the Energy XLE ETF has advanced just 1.6 percent in 2018, one-fifth crude’s gain. However, it is catching up. The ETF is on track for a 9 percent gain in April, tracking for its best monthly performance since September.
If oil keeps up its gains, energy stocks will likely catch a bid, said Maley.
“Crude oil has only been below $60 on three days the whole year this year and we have nice demand,” he said. “If oil can hold up you should see the XLE break out even more.”
A surprise drawdown in domestic crude inventories and expectations for continued support for global supply cuts kept an oil rally going Wednesday. Saudi Arabia is reportedly pushing for crude to reach as high as $100 a barrel, likely through OPEC‘s production cap agreement.
The fact the recent rally in energy names has been broad also gives Maley confidence in the sector’s comeback.
“You could see 10, 12 stocks in the XLE that have broken out before Exxon has,” said Maley, noting that Exxon Mobil has the largest weighting in the XLE at 22 percent. “If Exxon, being the biggest percentage holder there, can break above its February highs and make a new high, that’ll attract more momentum to that stock which will bring more money to the XLE.”
Exxon hit a 52-week high of $89.30 on Jan. 29. Its shares currently sit in correction territory, having fallen 11 percent below that level. The stock is down 5 percent year to date.
Economic fundamentals are also setting the energy sector up for gains, said Larry McDonald, editor of the Bear Traps Report.
“Because of cheap financing and rising rates, you’ve got a lot of companies and mergers that are in the works in this space,” McDonald told CNBC’s “Trading Nation” on Tuesday. “We feel you’re going to have a real pickup there in M&A this year so XLE, XOP, big, big winners there.”
Energy’s relative underperformance in the past few years also makes it prime for a rebound, said McDonald.
“You’re talking about a real long-term bear market and there’s signs that we’re coming out of the great bear into a new bull and that’s what we’re looking for,” he said. “This is a secular shift, a fantastic opportunity. The money is shifting in toward commodities. … We think it’s in the early inning and could last two to three years.”
Since 2013, the XLE has fallen nearly 17 percent, while the S&P 500 has risen 47 percent. In 2015 when crude tumbled below $50 a barrel, the XLE slumped 23.8 percent in its second worst annual performance ever.