Trends in the Energy sector are strong and getting stronger.
Already, the number of Energy stocks trading above their 200 day moving average outpaces that of every other sector in the index. On a shorter-term basis, though, uptrend breadth is even stronger. Should the recent strength persist, it will drag more of the sector into long-term, technical uptrend territory.
Is there a sector right now that’s stronger than Energy? It seems every single stock in the group is rising – and that’s because every one of them is.
Our favorite way to quickly identify uptrends and downtrends is to compare a stock’s price to the level and slope of a moving average of trailing prices. If the current price is above a rising moving average, then that stock is in a technical uptrend. If a stock is trading below a falling moving average, it’s in a downtrend.
Right now, EVERY Energy stock in the S&P 500 is trading above a rising 50-day and a rising 100-day moving average. No other sector comes even close to matching that strength.
Energy stocks had every reason to fall apart.
A huge bearish momentum divergence turned up at the end of last year, at the same time prices were running into 15-year resistance levels. The global economic outlook weakened, pointing toward lower demand for commodities. Oil prices fell to $65, less than half of last year’s peak levels.
Instead of a major selloff, though, Energy seems determined to work off that bearish momentum divergence with time, rather than price. The sector is stubbornly hanging near those former peaks.
The bears have lost control.
After being the best performing sector in 2021 and 2022, Energy has been the worst of the risk-on sectors this year. Somehow, they’ve managed to underperform even the Financials, where we’ve dealt with the some of the largest bank failures of all-time. That’s quite the accomplishment when you think about it – especially since we’ve hear relatively little about fundamental stress within the sector.
Sure, oil prices have declined quite a bit from last year’s peak levels, but earnings for the group are still quite healthy and payouts are more shareholder friendly than they’ve been in years. The fundamental story hasn’t changed all that much, but the technical picture began to weaken in December.
Our concerns about Energy have proved to be well-founded.
Energy stocks have gone nowhere for 15 years.
The Energy sector faces significant headwinds, which skews the risk/reward in favor of bears. For months, we’ve been pointing at tough resistance and waning momentum on both an absolute and relative basis. The sector has been unable to surpass its 2014 highs, and weekly momentum failed to get overbought on the most recent rally. At the very least, we think it takes some time to work off that bearish momentum divergence. At the very worst, prices revert back to the 200-week mean.
The Energy sector turned in a modest performance during February, outperforming during the first half of the month, and then lagging during the final weeks.
We downgraded the Energy sector shortly after publishing our December outlook. Bearish weekly momentum divergences on both the relative and absolute charts had us cautious about the future of the sector.
Nothing has changed. Except perhaps that we’re even more concerned about the future of the sector.
Remember, momentum divergences don’t always lead to trend reversals, so we’re ready to reinstate Energy’s overweight rating should prices resolve higher. For now, though, we see weakness as a more likely outcome.
The sector is dealing with resistance from the 2014 highs. For those of you that have been around that long, 2014 was the year that oil prices began a huge, multi-year decline. That former peak has some memory.
Here’s a chart that screams trouble. The Integrated Oil & Gas industry just put in a failed breakout above its November highs. What’s more, momentum failed to even get overbought on that rally. You’re probably tired of reading the same words over and over again, but we’ll say it again. From failed moves come fast moves in the opposite direction.
Crude oil breaking below 70 could be the trigger that sends the Energy sector into a tailspin.
One bright spot has been Hess, which recently broke out above its 2008 highs. We can still target 200 if the stock is above 140, but if it’s below those ’08 highs, we want to take note for potential weakness in the rest of the sector.
We downgraded the Energy sector shortly after publishing our December outlook. Bearish weekly momentum divergences on both the relative and absolute charts have us cautious about the future of the sector.
