While most investors were focused on the recent volatility in the equity markets and the weakness in the crude oil and natural gas markets, shrewd money managers were taking advantage of the low prices in the oil sector and buying undervalued stocks.
One ETF market that may have turned the corner at least in the short run is the S&P Energy Select (XLE). After reaching its lowest level since the week-ending June 28, 2013, it posted a strong rebound from last week’s low at $77.51. It is currently trading close to 10% higher at $86.28.
Based on its sell-off from $101.52 to $77.51, it could trade as high as $89.52 to $92.35 over the near-term. This zone represents a 50% to 62% retracement of its 2014 range.
We can’t know for certain if this rally by the energy sector ETF means that a bottom has been reached in the crude oil market, but we do know that investors haven’t given up on equity stocks for their portfolios. The buying spree is likely being fueled by value-seeking money managers. The size of the rally over the short-period of time also suggests aggressive short-covering is taking place.
Typically, a short-covering rally doesn’t last very long so investors should be careful about chasing this market higher. If you missed the rally then the best thing to do is wait for a retracement into more favorable price levels. Longer-term rallies usually take place after a solid support base has been formed. In the case…