Energy stocks are about to play catch-up to the rest of the market, one strategist says.
Larry McDonald, founder of the Bear Traps Report investment newsletter, has been watching closely the apparent disconnect between strong global growth and lagging oil stocks. After all, domestic and international stock markets are near all-time highs, he pointed out. While energy has been lagging other sectors this year, the group is about to play catch-up as oil prices rise, he said. Here's why.
• OPEC is scheduled to meet next week in Vienna, and McDonald believes the group of oil producing nations is going to position for a further reduction in output; this could in turn buoy oil prices.
• Political tension in oil-rich nations like Saudi Arabia "could be very disruptive for the global oil market and create a supply shock," McDonald said Tuesday on CNBC's "Trading Nation."
• Furthermore, he said, "you've got India and China growing at the fastest pace in years. So you've got an economic pickup globally, and it's just setting up for a situation where oil and oil producers are coming into, potentially, a sweet spot."
• To capitalize on this growth, McDonald said investors should look to play one large energy exchange-traded fund, the XLE. He holds a $78 price target on the XLE in the next six to nine months, implying nearly 16 percent of upside from current levels.
Crude oil and the XLE settled higher on Tuesday.
Bottom line: McDonald believes the fundamental backdrop supports higher oil prices ahead, and energy stocks will benefit.