Sentiment is Too Bullish on Energy Stocks

The $78-$80 area has been a huge price magnet in the XLE since the oil crash last September-October, and it is no accident that price has paused in front of this level for the past couple of weeks:

XLE_Daily_4.2.2015

In many ways the volatility, sideways oscillation in energy stock during the past several months could be construed as a bullish phenomenon. However, there is one glaring problem with being bullish on the energy sector right now – the sell-side analysts are bullish on energy too!

 

S&P_sector_price_targets

 Source: FactSet

While this is not a dealbreaker in and of itself, it is definitely not a positive sign for investors who are long the energy sector. The sell-side has been consistently wrong on energy stocks for the last year, so why should one think they’re going to get it right this time?

From my perch, a much more significant piece of information would be a rally above the $81 in XLE. This would drastically increase the odds that a sustainable bottom is in place and set up a further move higher to fill the gap in the $84s.