Group Overview:
As the overall market left nowhere to hide this week, energy crumbled. The XLE lost 7.1%, the OIH dropped 9.1% and the XOP fell 10.2%. WTI lost ground for a third consecutive week after a bearish shooting star weekly candle the week ending 10/5. It CLOSED above its 200 day SMA Friday, and gained ground on Wednesday as the S&P 500 lost more than 3%. Give very light credit for the XLE being the second best actor Friday of the major S&P sectors, albeit still falling .75% (all 11 major groups fell to end the week). The severity of beatings on a weekly basis were hard to ignore with EQT losing nearly 30%. SLB, as poor as the drillers have acted, recorded just its first 3 week losing streak in over a year. It is lower by 34% from most recent 52 week highs and this week lost 9.5% in the second largest weekly volume of 2018, behind the week ending 2/5 which slumped 11.5%. With the new phrase “peak demand” gaining traction in regards to crude, will it also apply to potential buyers of the equities?
Equipment Versus Exploration:
Below we take a look at the ratio chart of the oil services group against the traditional E&P names. The OIH is down 19% YTD lagging well behind the XOP which is off just 3% so far in 2018. The tide seems to be leveling off however as during the last one month period both have fallen 16%. That is not to say one has to rush out and buy equipment names, but just be aware that outperformance going forward is a good possibility. Prepare a watchlist for if the space becomes in favor once again, this subsector can show relative strength. The XOP is a much more diversified ETF as the top 4 holdings comprise just above 2% each, whereas the XLE is dominated by XOM and CVX that make up more than 40% of the fund, NOT a typo. With the XLE, investors will get a much bigger dividend yield so traders have to decide if they want a greater concentration at the top, or younger more nimble plays of the XOP.
Examples:
The XLE was just crushed this week to the tune of 7%, by far the worst return of the 11 major S&P sectors. As we always mention some names hold up better than other within a group, and others do just the opposite. And both often reveal valuable clues. If a specific name was strong in a downturn, or weak in an uptrend there is a reason for it. We may understand what caused the movement, but the PRICE action is never to be dismissed. Below is an example of a laggard and how it was profiled in our Energy Sector Review from 10/15. It now trades 42% from most recent 52 week highs and is on a current 5 week losing streak and this week lost a large 14.9%. As we also like to point out a trades could become more success prone if the stated pivot has a “cluster of evidence”, meaning more than one reason for entering a position at the stated price. Here it was 200 day SMA resistance, AND a retest of a breakdown from a symmetrical triangle.