Is an Energy Sector Bottom In?

Energy related stocks in the S&P 500 have been brutalized with oil trading trading below $80 per barrel to multi-year lows. Now analysts see the opportunity to become contrarian bullish on the S&P 500 Energy sector.

BofA/Merrill Lynch's Stephen Suttmeier noted Tuesday that the energy sector hit capitulation levels in mid-October not seen since the 2002 low. He said what is interesting is that investors capitulated right at chart and uptrend support, which converge at 600-590 on S&P 500 Energy.

"We are not ruling a retest or undercut of the mid-October low at 571 for S&P 500 Energy but downside volume capitulation off key support suggests that the worst is over for the sector. Energy is poised to build a base and head higher," he said.

This technical view also echos the thoughts from the firm's fundamental equity analysts, which said today they have increasing conviction the bottom is in.

Equity analyst Doug Leggate said with the sector on average discounting $75 oil, they believe absolute valuations are attractive for the majority of stocks under their coverage. Top picks in the sector are Occidental Petroleum (NYSE: OXY) and Hess Corporation (NYSE: HES), while Anadarko Petroleum (NYSE: APC) and Devon Energy (NYSE: DVN) justify another look. Also, all three 'pure play’ gas names remain Buy rated - Cabot Oil & Gas (NYSE: COG), Range Resources (NYSE: RRC) and Southwestern Energy (NYSE: SWN). For higher beta exposure they see the greatest value trade off with Continental Resources (NYSE: CLR) and Pioneer Natural Resources (NYSE: PXD) while for defensive exposure ExxonMobil (NYSE: XOM) is preferred.

Lastly, on November 10th, BofA/Merrill Lynch's MacNeil Curry highlighted the potential for a bullish turn for WTI Crude Oil. Curry said, "As we repeatedly stressed over the past week or two, this last leg lower is likely the final gasp of the 5m downtrend, from which a larger, medium-term base and bullish turn in trend is likely. Sentiment (using Market Vane's Bullish Consensus figures) and momentum (RSI) are supportive of this medium-term basing view. Specifically, both are at multiyear extremes, from which base and bullish turns have transpired. Get ready for a medium-term turn in trend."

Related ETFs: (NYSE: XLE), United States Oil ETF (NYSE: USO).

You May Also Be Interested In

• Netflix's subscribers, TSMC, Tesla upside - what's moving markets
• Crude Inventory Rose 2.7 Million Barrels Last Week, Says EIA
• Oil prices steady after 3% tumble; US reimposes Venezuela sanctions