Relative strength index suggests refiners may be overbought
The RSI (relative strength index) is a momentum indicator that helps determine when an asset is oversold or overbought. An asset is considered to be overbought when the RSI approaches 70. At this point, there’s a risk that you may see a pullback. Conversely, as the RSI approaches 30, the asset is probably oversold and could become undervalued, causing an eventual upward revision in its price.
In two recent Market Realist articles—Are Refiners Overbought? and Refiners Edge Toward Upper Bollinger Band, Possibly Overbought—we questioned whether refiners such as Tesoro (TSO) and Valero Energy (VLO), which had RSI levels hovering over the 70 level, could be overbought. In the past week, refiners have posted weekly losses, as seen in the chart above. This has reduced their RSI levels to near the middle of the indicator’s range.
We also suggested that Consol Energy (CNX) might be oversold, given it’s RSI hovering around 17. As mentioned in Part 2 of this series, Consol Energy just saw a sizeable insider purchase by Greenlight Capital. The stock’s RSI stood at close to 28 at the end of last week, still within the potentially oversold region.
Top performers, refiners could see good times end
According to data from Bloomberg, US refiners have been the best-performing stocks in the energy sector on the S&P 500 Index for the last four years. Refiners have profited from access to cheaper crude oil inputs. However, with a series of refinery projects being ramped up in Latin America, US refiners could witness their exports to Latin America stalling. The region accounts for close to 50% of US fuel exports.