This Oil ETF Rally Should Be Handled With Kid Gloves

For beleaguered investors and traders in the energy sector, resisting the temptation of being excited about last week's memorable oil rally is probably difficult. After all, the United States Oil Fund LP (ETF) USO, which tracks front month West Texas Intermediate futures, surged nearly 17 percent from August 25 through August 28.

Quiet as it may be kept, USO enters Monday on a four-day winning streak. The ETF continued its torrid pace of asset gathering last week, adding $199.4 million in new assets, bring its year-to-date inflows total to $2.12 billion.

Enthusiasm for the oil patch was not limited to futures. Market participants continued their love affair with equity-based energy plays, too, as the Energy Select Sector SPDR XLE pulled in almost $928.4 million.

XLE, the largest equity-based energy ETF by assets, has seen 2015 inflows of almost $2.4 billion. Said another way, XLE and USO have added over $2.5 billion combined this year despite being down 15.8 percent and 26.9 percent, respectively. However, if recent history repeats, traders would do well to treat this latest oil rally with extreme caution.

Related Link: Will Oil Ever Recover?

“The sharp rally on Thursday and Friday exhibited many of the same characteristics as the moves higher at the end of January and middle of March. As a reminder, the first move higher in January led to sideways price action before re-testing the January lows. It wasn’t until mid-March that crude oil began its ~50% move higher over the following two months,” said Rareview Macro founder Neil Azous in a note out Sunday evening.

Up And Down

USO's February to mid-March swoon resulted in a decline of more than 19 percent while XLE's loss over the same period was 9 percent. From its March trough to its April peak, XLE climbed 12.4 percent while USO's March trough to April peak move was a surge of more than 3 percent. Yet, the losses from there have been borderline catastrophic. USO has plunged 26.7 percent over the past 90 days while XLE has tumbled 16.1 percent over the same span.

“Therefore, you have to be open to the idea that after last week’s ~20% bounce that similar to January’s ~23% bounce it will trade sideways-to-lower first before repeating the pattern of last March and a sustained move higher can materialize,” added Azous.

With the benefit of last week's rally, USO moved almost 5.5 percent above its 20-day moving average, but the ETF enters Monday 9.4 percent below its 50-day line and almost 23 percent below its 200-day moving average. Friday's close above its 20-day line was the first for USO in over a month.