Here’s when you’ll know it’s safe to buy energy

The S&P 500 energy sector is on pace for its best week of the year as crude oil has bounced, and some say the sector — one of the year's biggest laggards — is at a turning point.

The price of crude oil, typically a big driver for energy stocks, broke above the psychologically key $50 per barrel level in Thursday trading for the first time since early August, rising 0.40 percent in that time. That's boosted energy stocks, which have gained 1.6 percent in the same time and now stand at a technical "key juncture," said Matt Maley, equity strategist at Miller Tabak.

"On a very short-term basis, they are overbought, so we could see a bit of a pullback here to take a breather. But they've had a nice run here, and they've broken some key resistance levels," Maley said Thursday on CNBC's "Power Lunch."

Now, though, energy stocks must "make a higher high to really signal that the trend has changed," he said.

Specifically, one large energy-tracking exchange-traded fund (XLE) just broke above its 50- and 100-day moving averages, as well as what Maley points to as a downward-sloping trend line that began forming last December. Technicians often look to breaks in trends to confirm price action.

The same bullish activity, he said, has emerged in the equal-weighted S&P energy index, a broader measure of that sector.

The change in technicals has also been confirmed by the fundamentals. When it comes to the S&P 500 oil and gas industry, earnings growth for this year is expected to come in at a 240 percent increase, said Erin Gibbs, portfolio manager at S&P Global. And that, she said, is actually a substantial downward revision from the beginning of the year.

"At the beginning of the year, we expected 350 percent [growth]. So it is a big decline, but overall it's good that at least 240 has been stable for the past month. We've seen that although earnings come massively down, they've basically been reduced by one-third … they've been stable for the past month and a half along with those oil prices," she said Thursday on "Power Lunch."

She added: "For us, looking at both the stability of the earnings as well as the valuations, this actually looks like a potential turnaround for the energy stocks."

Valuations for names within the oil and gas industry appeared to find a bottom in May, Gibbs said, which has given her more optimism for the group.

The energy sector, along with crude oil prices, was trading slightly lower on Friday.


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Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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