Last month, I alerted investors to a new trend emerging in the Energy space. Crude oil prices were on the rise, and I advised some investors to consider Commodities over Energy stocks.
To read the full article, “Two Ways to Play the Energy Breakout” click here…
As the geopolitical storm continues to heat up between the United States and Iran, prices in the oil markets are rising as well.
The Trump Administration announced its intention to pull out of the Iran nuclear deal…
In turn, Iran has threatened to turn off the pumps and cut the world’s supply of oil – just the threat is enough to send prices of black gold skyward.
We often see rises in price based on the fear of some future event. This kind of activity even has its own name, the Fear Premium.
This is compounded by the fact that Venezuela, holder of the largest proven oil reserves in the world, is experiencing political turmoil and failing infrastructure.
The US government recently announced sanctions against a Venezuelan government official accused of extortion and money laundering, meaning they have now taken a stance against not one, but two of the world’s major oil exporters.
This kind of environment has the potential to present investors with some big opportunities…but only if they know where to look.
Energy has been, by far, the most improved sector on both a relative strength and absolute return basis in the Domestic Equity Asset Class over the last two months.
Between April 2 and May 18, 2018, the SPDR Energy Select ETF -XLE has more than quadrupled the return of the next strongest sector, Technology, and the SPDR Technology Select ETF -XLK. In fact, XLE is currently seeing it’s longest daily winning streak since 2006.
Strong momentum in oil (a sub-sector of Energy) has propelled the entire sector into the top three ranked sectors (out of 11), leapfrogging both Consumer Cyclicals and Industrials in just one week.
It’s been more than a year since Energy has ranked this high in the sector rankings, trailing only Technology and Financials – the current #1 and #2 ranked sectors respectively.
Using the SPDR Energy Select Fund (XLE) as our sector proxy, we can see strength in both its price and relative strength charts.
Below is a weekly price chart for the SPDR Energy Select ETF (XLE).
Two important resistance levels have been taken out at $75 and $77.50. A break above past resistance often clears the way for more upside.
If XLE can push through a small area of resistance at $80 (red dotted line), the next serious hurdle won’t come until it tests its 2014 peak around $90.
The relative strength chart below compares our Energy sector proxy (XLE) vs. the S&P 500 (SPY) and confirms what we’re seeing in the price charts – that the sector continues to show strength vs. the market.
Keep in mind, when using a relative strength chart to compare two stocks, funds, or markets, a rising line indicates strength of the first symbol (XLE) when compared to the second symbol (SPY). We express this relative strength comparison as “XLE:SPY”.
A falling line would alert investors that XLE is weak relative to the general stock market – and would indicate that investors should consider alternatives.
In this case, the steep rising relative strength line we see beginning on March 19, 2018 is an indication of meaningful outperformance of XLE over the S&P 500.
In addition to price and relative strength charts, we’ll often reference the Relative Rotation Graph.
The Relative Rotation Graph, or “RRG”, is available to investors via StockCharts.com.
At a glance, the RRG provides a visual reference of strength between sectors or securities.
The graph consists of four quadrants:
- Leading sectors (green),
- Weakening sectors (yellow),
- Lagging sectors (red), and
- Improving sectors (blue).
The RRG below utilizes SPY as its benchmark comparison to major domestic sectors.
The sector RRG above shows XLE (green line) jumping from a lagging sector, through improving to a leading sector. No other sector has come close to the kind of strength we’ve seen recently in XLE.
Oil exploration and production companies have been a big driver behind the energy sector’s improvement. With oil prices rising, companies have finally been able to implement plans to ramp up production, usually by resuming projects which stalled when oil prices tanked in 2014.
Here are a few Energy sector ETFs that currently rank highly in our Energy sector matrix.
The Relative Strength Graphs below compare several individual stocks to the SPY (as a market benchmark) and XLE (as an energy benchmark).
As you can see, names like Andeavor (ANDV), ConocoPhillips (COP), Hess Oil (HES), and Marathon Oil (MRO), show relative strength to both the market and energy sector.
This indicates that these are companies best positioned to provide investors an opportunity to outperform the Energy sector.
But make sure you watch the charts before jumping in, as prices have moved rapidly to the upside.
Weaker names, such as ExxonMobil (EOX), Schlumberger (SLB), and Concho Resources (CXO), have all moved into lagging status vs. our benchmark Energy proxy (XLE).
Historically speaking, these companies tend to be less likely to offer investors sector beating returns.
Keep an eye on the charts as the price of oil related stocks and ETFs react quickly to headlines. And as always, invest wisely and use proper risk management strategies and invest only in what your investment professional has determined is appropriate for you
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