The world is still underestimating the energy trade…
Year to date, the energy sector has surged 59%. That crushes the roughly 13% return of the S&P 500 Index. But some of the world’s biggest investors are already bailing on the trade.
According to the October 13 Bank of America Global Fund Manager Survey, money managers reduced their energy exposure by more than 12 percentage points. In other words, the world’s hedge funds turned bearish on energy last month.
But contrarian investors should be happy to see this reversal. Despite last month’s sentiment slump, we’ve seen sustained bullish price action in the oil and gas production sector…
For the past few years, oil and gas production stocks have been caught in a limited range.
An asset is “range bound” when its price bounces between two predictable levels. Over time, this ping-pong pattern forms a visible price channel.
As I’ll explain today, when a price channel breaks down, that gives us valuable information…
Ranges Point to Trends
We can think of a price channel as a debate between bears and bulls.
As bears make their case, the asset slides down its range… and as bulls make their counterpoint, the price bounces back.
Often, the debate ends when prices break out of their range in either direction. If an asset falls below its price channel, that means the bears have won the argument… and a further downtrend becomes likely.
But the inverse is also true. When an asset breaks through its upper range, the bulls typically take control – and the asset often surges higher from there.
Ranges also give us hints about the duration of future price moves. When the range-bound debate is brief, the post-range trend tends to be short-lived. But when the debate is long, the post-range trend tends to be as well…
Right now, we’re seeing a potential long-term trend take shape in oil and gas producers. Take a look at the performance of the State Street SPDR S&P Oil & Gas Exploration & Production Fund (XOP)…
Since 2022, XOP has been caught in a range between around $107 and $152 a share. If we ignore the fund’s drop during the COVID-19 pandemic, this range stretches back to 2017.
But at the start of this year, XOP broke through its ceiling and forged higher. Since then, it has been making higher highs and higher lows – a classic sign of an uptrend.
We see this price action as a decisive resolution to the market’s “energy debate.” The bulls are now in control – and after years of range-bound trading, XOP’s uptrend could last for years as well.
That’s a strong setup for outperformance. While fund managers are bailing on energy, you should consider making the opposite bet.
Add oil and gas production stocks to your watch list today.
Good investing,
Chris Igou
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