Energy Excess:

The energy group is normally at the extremes of the major S&P sectors on a YTD basis. The chart below from the Novel Investor, shows this very clearly as 4 of the last 5 years, the XLE has been the best (just once in ’16) or the worst performer with 2014, 2015 and 2018 down sharply and 2017 it was the second softest major group. It is sticking to the theme this year as it is the 10th best actor of the 11 sectors, up just better than 8%, although the ETF is still in bear market mode lower by 22% from most recent 52 week highs. The fund is looking for its first 3 week winning streak, up 3.2% this week so far, depending on Fridays CLOSE, since last December to this January period. 

How Defined Are Its Legs?

Will the nascent rally in energy turn out to be a dead cat bounce? With the vast majority of names in the group beneath their 200 day SMAs, one should treat the move cautiously. The XLE on its PRICE chart was rejected at its downward sloping 200 day Tuesday, and it has been underneath the long term secular line for 11 months. It has recovered a bit more than half of the 6 week losing streak the weeks ending 7/19-8/23, but a big hang on the ETF has been XOM. The top component in the fund is lower by 18% from its most recent 52 week highs. More specifically its relationship compared to chief rival CVX has been awful. CVX sits just 5% off its own most recent yearly peak. The big question is how strong are the quadriceps of the overall energy arena. Will they be able to show muscle, and continue this move as shown in the ratio chart below against the S&P 500? So far so good, but remember trends are most likely to persist than reverse, so start your investments small.

Examples:

We often discuss the importance of PRICE confirmation on a CLOSING basis, and not to front run the pivot. Of course it is not foolproof, but it increase your chances of success. Below may be a good example of that with the WEEKLY chart of HCC and how it appeared way back in our 4/9 Energy Note. The coal name came to my attention as the KOL missed a 10 session winning streak by pennies Tuesday, but prior to that recorded a nasty 8 week losing streak and it still trades 24% off most recent 52 week highs. HCC never touched the entry point and as good as it looked, buying early would have been a drag on your portfolio as it fell precipitously. Give it credit for holding the very round 20 number well recently, but this is a no touch here in my opinion.

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