Energy Stocks: Time to Buy? Here's What You Need to Know

Energy Stocks: Time to Buy? Here's What You Need to Know - oil cartoon 03.29.2016

If you're heavily-invested in Energy stocks it's been a heck of a year. Large-cap Energy stocks (XLE) are easily the worst performing sector in the S&P 500, -9% year-to-date versus +4.8% for the broader equity market. 

After the tumble and with the broad-based march higher making other S&P 500 sectors appear expensive, long-term value investors are coming out of the woodwork to look for bargains among Energy stocks. Before you buy, you must be convinced the worst is behind oil-related equities.

Here's what you need to know from today's Early Look written by Hedgeye CEO Keith McCullough:

Energy Stocks: Time to Buy? Here's What You Need to Know - el key take

"From a longer-term “value” or anti-mo-mo buyers perspective, I think buying XLE is a lot easier today than any other day in 2017. That’s mainly for 3 reasons:

 

  1. The underlying volatility signal of Oil itself is no longer bullish (OVX TREND resistance = 31.67)
  2. Oil’s (WTI) intermediate-term TREND signal remains bullish (TREND support = $49.29/barrel)
  3. The implied volatility premium (vs. 30-day realized) is at multi-month highs at +30.2%"

On that last point, and without getting too into the specifics, an implied volatility premium basically means fearful investors are betting oil prices will be more volatile in the future. As you can see in the Chart of the Day below, generally when the implied volatility premium (read: fear) stretches this high those worries get overcrowded and ultimately falls.

Energy Stocks: Time to Buy? Here's What You Need to Know - 04.20.17 EL Chart Image