Energy stocks slid 8.7% last year and was the only S&P 500 (NYSEARCA:VOO) industry sector to lose value in 2014.
Have energy stocks (NYSEARCA:XLE) really bottomed?
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“Despite declining oil prices over the past few months, industry analysts are most optimistic regarding the Energy sector in 2015, based on their current ratings and target price estimates. In terms of ratings, the Energy sector is tied with the Health Care sector (NYSEARCA:XLV) for the highest percentage of Buy ratings (57%) of all ten sectors as of December 31. In terms of targets, the Energy sector currently has the largest upside difference (+16.9%) between the bottom-up target price ($685.03) and the closing price on December 31 ($586.59).”
Is enthusiastic buying really the sign of a market bottom? Or is it capitulation selling by disgusted sellers? Which is it?
What about “cheap” valuations?
Maybe Wall Street’s analysts think energy stocks (NYSEARCA:XOP) are cheap, but the data hardly supports that conclusion. Energy’s (NYSEARCA:ERX) forward 12-month P/E ratio is 16.6 compared to 16.2 for the S&P 500 (SNP:^GSPC). Furthermore, the current P/E ratio for energy is well above its 10-year historical level.
To recap: Frothy valuations plus deteriorating technicals (XLE trades below key 50 and 200 day moving averages) coupled with enthusiastic buying is hardly the sign of a market bottom.
Deeper analysis of energy valuations and historical perspective is covered in the January 2015 issue of the ETF Profit Strategy Newsletter along with trading setups.