Oh man, it's happening again. Oil is rallying, and so are oil stocks. Both are up about 10 percent in a month.
And almost no one thinks it will last.
Here's the story this time: Oil supply is tightening. OPEC compliance with production levels has increased. The shale guys have increased activity, but not as much as some feared, and demand numbers have been steadily on the increase.
The result: a big oil rally, with Anadarko, Marathon, Hess, Devon, and Apache up double digits this month, and even Exxon and Chevron up 6 percent and 9 percent, respectively, both among the leaders of the Dow Jones industrial average for the month
We'll see. The whole energy story this year follows one heartbreak after another, and investors don't want anything to do with this sector.
Who could blame them? On at least three occasions, investors have had their heads handed to them, and we may now have a fourth heartbreak. Let me explain.
The first big energy rally occurred at the election, when energy stocks climbed 10 percent into the first weeks of December. The sector was far better than the 5 percent rally in the S&P 500 at the time.
But oil stocks were already off their highs as we entered the new year. They dropped steadily for the first two months of the year and accelerated their decline when oil dropped below $50 in March. They fell 12 percent from their highs, giving back all their postelection gains. That was the first heartbreak.
The second began when oil rallied in late March, going to almost $54 by mid-April, and investors again began buying oil stocks, pushing them up 6 percent in a month.
But it didn't last — oil resumed its slide and was again below $45 by early May and down to $42 in late June. The Energy Select Sector SPDR, the XLE, went almost straight down, losing 12 percent.
Then came the third heartbreak. A six-week rally took oil to $50 by early August, and oil stocks rose 6 percent, but again they gave it all back when oil dropped into the mid-$40s.
You'd think everyone would give up by now. But oil rallied 10 percent this month to its highest level since April, and we get the biggest oil stock rally of the year. The XLE is up 10 percent in a little more than a month.
Is the fourth heartbreak coming? Who knows. Looks to me like it's a rally based on fundamentals — so far. Investor sentiment is about as bad as you could ask for. There's little money in the sector, and that is certainly a plus. The energy weighting in the S&P 500 is 7 percent. It hasn't been that low in more than a decade.
So once again, the analysts are saying, you have some fundamental improvement, and you've got a lot of cheap stocks here. Anyone interested?