Drillers Non Delight?:
The energy arena has been a tough one to play with lots of volatility on display. The XLE traded in the upper 70s on three separate occasions in 2018, and comparing the two big drawdowns this year show glaring differences. The one in February looked a lot better as it traded in a tight weekly range between the weeks ending 2/16-4/6, following the vicious 2 week combined loss of 14.5% the weeks ending 2/2-9. That led to a 6 week winning streak from early April to late May, before another nice digestion on the XLE between late May and early October. The most recent implosion that shaved 14.5% in value off the ETF the weeks ending between 10/12-26, has been followed this time by erratic trade. That being said the XLE is now down 19% from most recent 52 week highs, while the OIH is down double the amount to the tune of 39%. Below is the weekly chart of the OIH, which even after this precipitous drop could see further weakness ahead.
Ratio Chart of Small Cap Energy/Large Cap Energy:
One would have to have been living under a rock to not be aware of what has transpired with crude this year. Before hitting an all time eye just below 77 on 10/3 the commodity has plunged. A price drop could have been expected after such a quick failure following a cup base breakout trigger of 75.37 on 10/1 (classic red flag for any instrument when a promising move falls apart rapidly). But some have been hit harder than others, and the chart below illustrates just how painful it has been being a member of the small cap energy space. Some of it certainly has to do with the robust dividends plays like XOM and CVX pay, both in the 4% neighborhood, as they are the two largest components in the XLE. On the flip side the PSCE, the small cap energy ETF has a less dominant weighting with its top holdings, although it is an illiquid vehicle. Comparing the price action among each of the biggest components, XOM is now 14% off most recent 52 week highs, while PDCE sits 47% off its own recent highs. Drill baby drill perhaps has come back to haunt the overall group as we are now the worlds largest producer.
All stocks are not created equal, especially names within the oil and gas exploration and production group. Below is the chart of ECA and how it was profiled in our 10/29 Game Plan (we have produced little research on the sector as we were unable to find compelling opportunities until now). This name has been cut in half since the beginning of October, not a typo, falling 7 of the last 8 weeks, and this week is lower by nearly 4% already. The stock traded as low as $3 in January 2016, and can a retest of that level be in the making (the measured move on the ascending wedge is to $5.50)? Of course no one knows for sure, and volume has been capitulatory, as all of the last 4 weeks were accompanied by the largest weekly volume since the week ending 6/23/17. There is a little ammunition for both the bulls and bears and thats what truly makes a market.