Consider an inverse ETF to profit from falling energy prices in the short term, writes Jim Farrish, but be ready for new value opportunities in select stocks and ETFs when the sector finds firm support.
The energy sector has been under pressure while the price of crude oil falls dramatically. As a consumer, you look at the price of oil dropping more than 6% in a week and you are cheering that gasoline price may fall soon. However, on Wall Street, the reaction is different…that is, if you own oil stocks or crude oil futures.
The below chart of crude shows the dramatic drop, but it is worth noting the support levels for oil prices looking forward. On Monday, the test of the $95.50 level may have put in a temporary low. The bounce back intraday to close above the $97.50 support was a key move, technically.
The bigger question, of course, is what does this mean for the stocks in the energy sector looking forward?
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The Select Sector SPDR - Energy (XLE) chart below shows a downtrend in play since the high in February. The break below support at $70 and the 200-day moving average (MA) both were negative in early April. The bounce off $68.25 support coincided with crude rising back near $106 and has since retraced along with the price of crude. The sector is now in negative territory for the year, making it the biggest laggard among the broad sector indexes.
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That said, are their opportunities in the energy sector as a result of the selling? It is worth scanning the stocks that make up the index and looking for some of the better dividend stocks that are trading at or near support levels. ConocoPhillips (COP), Spectra Energy (SE), Chevron (CVX), and Exxon-Mobil (XOM) are the top dividend stocks to watch in the sector, as well as XLE itself in the near term.
NEXT: How to Short the Energy Sector in the Meantime
|pagebreak|For those who would like to take advantage of the selling and make money as the stocks decline, there is the ProShares Short Oil & Gas ETF (DDG). This is the non-leveraged inverse fund offering the investor the opportunity to participate in the downside swing in energy stocks.
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The oil services stocks are also in a downtrend. Your choices there are either the iShares Dow Jones US Oil Equipment & Services Index Fund (IEZ) or the Market Vectors Oil Services ETF (OIH). The sub-sector may have another 6%-10% of downside risk based on the break below key support levels on Monday. This is one area to avoid in the energy sector short term, however, it is worth watching relative to support. Once the speculation and selling subside, there will be equal opportunity to own quality stocks.
Natural gas is another component of the energy sector that has been in a long-term downtrend since the 2008 highs. After hitting a low of $1.88 per BTU three weeks ago, the price has bounced to $2.30 per BTU. That is giving some hope to natural gas as a commodity and the stocks that participate in the space. The First Trust Natural Gas Index Fund (FCG) is a good tracking ETF for these stocks, and the United States Natural Gas Fund (UNG) tracks the commodity itself. Both are worth adding to your watch list for any additional upside as the price of natural gas attempts to rebound.
The energy sector is under pressure from the falling price of crude. However, the need for oil and gasoline is not going away anytime soon…just the temporary view of the demand is impacting prices. Watch the downside to find support, and as the dust settles and clarity is gained, look for value in both stocks and ETFs to add to your portfolio.
See also: 4 Energy Stocks to Power Your Portfolio
By Jim Farrish of SectorExchange.com
