"So late this week, the oil and gas industry in the U.S., particularly the drillers and the well equipment and services companies, plus the operators and integrateds, enjoyed higher equity prices. Like the overall equity market, however, I think we've entered the danger zone. The energy rally is over-extended. Friday's strong move put the sector into a technical over-bought condition. Intra-Week Traders should not chase it higher here."

This interactive 30-Minute data chart shows that the first hour on Monday snared the dumb traders who were caught up in Friday's enthusiasm (as well as appetite) for these stocks. Then the charts show that my warning was a good one.

Integrated Oil & Gas - Global

This table shows that these very large cap oil stocks are paying impressive dividends, which could be a hook to get traders to hang in too long.

I note that even though crude oil contracts are trading much higher today, and the profits reported this week are solid for these companies, share prices have been coming off. Traders are starting to focus on the next quarter's results, and what might happen should crude oil prices start to come down here, or if interest rates possibly continue to move higher.

As rates move higher, some fixed income traders start considering a switch from equities to short-term bonds.

The yield on the U.S. 2-year Treasury Notes is presently about 3.90 pct. If, as and when the interest yield on surpasses the average dividend yield of the highest solid dividend payers (like some of the integrated oil companies), some money will flow out of stocks into bonds. The higher the spread, the more the money flows. That capital reallocation further pressures stock prices down.

Presently the integrated oils are trading in a price-to-earnings range of 10 to 14. In a major bear phase, such a price level could drop 30 pct to say a range of 7 to 11.

How could that happen you say when these stocks are trading with an average dividend yield of say 3.40 pct?

Well, that yield is already 50 basis points lower than the 2-year U.S. Treasury Note. If (hypothetically) the current equity price levels were to drop say 30 pct; that would increase the then available dividend yields to an average of say 4.40 pct. But, if the short-term bond yield were to simultaneously move into the 5 pct interest yield level " which would be possible at the bottom of a cyclic bear for both stocks and bonds " then the pressure to switch back to equities would be missing.

In my view, the only driver for higher equity prices in the integrated oils from this point would be higher crude oil prices into the $65 to $75 a barrel range. But that event would likely, in and of itself, start a major bear cycle for equities and bonds.

So, my point is that I think that energy stocks have gotten over-priced here. The risk/reward ratio no longer warrants buying these stocks higher.