In our weekend piece last weekend, we highlighted how the energy stock ETFs (the XLE and XOP) had become overbought on several of their weekly charts (and even the monthly chart when it comes to the XLE)…and thus they were becoming ripe for a short-term pullback. Well, it looks like we could be getting a fundamental catalyst to going along with this technical picture…which should indeed lead to some weakness in the group for a while.
The catalyst we’re talking about has to do with reports that the Saudis are prepared to boost output if Russian output were to decline in a substantial manner in the coming months…..There are, however, questions as to whether the Saudis have the capacity to make up a decline in Russian output…which could be as much as 2mm barrels……Of course, there are a lot of uncertainties as to how things will playout during the upcoming OPEC meeting…as well as over the coming days and weeks (possible meetings for Biden in the Middle East, etc). Therefore, there could/should be a lot of twists and turns to this story as we move into the summer months. However, given how overbought the sector has become on a technical basis, it does look like our call for at least a breather in the group over the coming days/weeks…after such a strong run…is indeed in the offing.
We turned bullish on the energy stocks way back in the fall of 2020…when pretty much everybody hated it. However, this is not the first time in the last 20 months that we have called for some short-term caution. We made similar calls in March and June of last year…and then again in March of this year (when crude oil jumped above $130 a barrel). Each time, it was followed by a decline of anywhere between 8% and 18% in the XLE…..Again, a lot can still happen on the fundamental side of things over the next few days/weeks, but it does look like our cautious short-term call will be prescient once again. (We have attached the updated charts on the XLE and XOP from last weekend below.)
Having said all this, we remain bullish on the sector on a longer-term basis. The supply side of the equation is constrained by a lot more than just the sanctions against Russia. The dearth of capital spending in recent years in the area of fossil fuel extraction and refining has made it impossible for the global supply of oil and gas to increase in a serious manner right now. Also, with China re-opening once again, the demand side of the supply/demand equation will be increasing going forward. Therefore, unless we see a serious recession in the global economy, energy prices will remain elevated for some time. Given that many/most of the energy stocks are a long way from being expensive, we don’t need $110-$120+ for WTI crude oil to help these companies grow their earnings. Thus, we remain bullish on the group on a longer-term basis. In other words, we believe this is a group that should not be chased at these levels…but we don’t think it’s one where investors should take a lot of chips off the table. Instead, it’s one that we think should be bought on weakness over the near-term.
(We do have to admit, however, that the fact that the monthly RSI chart is very extended right now is something that could mean that we’ll get more than just a short-term pullback in the group. However, given the supply constraints that face the oil market right now, we still like it on a fundamental basis.)
As for the broad market, last week’s rally has stalled-out a little bit over the last two days, but this is not a big surprise. Last week’s rally was a very strong one…so the fact that it has taken a breather over the past 2 days is not necessarily a problem. This morning’s drop in crude oil is helping the stock market bounce once again. We’re not so sure that this will be the catalyst for another leg higher to this bear market rally, but we have to admit that it is possible…..However, since nothing has changed in terms of the Fed’s new policy…and since the market is still overvalued (and likely to get more overvalued as the economy weakens)…we do not believe that the serious headwinds that the markets have been facing this year are already priced into those markets. (Not even close.)….Therefore, we still believe that any further rally in the broad stock market will be one where investors should continue to raise cash and get more defensive.
We’ll finish with one last quick comment. Late last week, in a financial news interview (and repeated in another interview this morning), we highlighted that we thought that three big cap tech names…FB, AMZN & GOOGL…were stocks whose valuation have become attractive (because they had fallen a lot more than many other big cap tech names). Therefore, we said that these are names that investors should look at buying gradually (every month) between now and the end of the year. We said that they probably see lower-lows before the year is over, but they won’t fall as much as other stocks (whose valuations have not become as attractive at FB, AMZN and GOOGL yet…even though their stocks are down a lot). However, we also said that it is impossible to pick the exact low (impossible to “catch a falling knife”), thus buying these names gradually over the rest of the year should give investors a nice position (at a good average price) in these names by the end of the year.
The news that Sheryl Sandberg is leaving FB is negative for the company in our opinion. She has been an unbelievable force in the company’s success. However, her departure has been expected for some time now…and with it trading at just above 14x earnings, we believe the stock’s valuation can withstand this change in management. Besides, it’s not like FB does not have a deep bench…..Therefore, this news does not change our opinion. We still believe it’s a stock that investors should look at buying on a gradual basis over the rest of the year.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.