Everyone hates the energy sector (Foreshadowing alert: Well, almost everyone). And a quick perusal of Figure 1 clearly illustrates why the energy sector is unloved.
Figure 1 – Ticker XLE versus ticker QQQ (Courtesy TradingExpert)
Since ticker XLE (Energy Select Sector SPDR ETF) topped out in 2014:
*XLE has lost -65%
*QQQ has gained +210%
And in another kick in the head to the energy sector, Exxon (ticker XOM) was just kicked out of the Dow Jones Industrial Average. Take that, losers!
So yeah, who wouldn’t hate energy stocks and decide to shun them? Well, as it turns out, the answer to that question of late is “the people who know the energy business the best.”
Figure 2 from www.Sentimentrader.com displays the Insider Buy/Sell ratio for executives and other muckety-mucks running energy related corporations. The picture speaks for itself.
As you can see, energy corporate insiders have been on a massive buying binge of late. Interestingly, they went on a buying binge in 2019 – apparently expecting an improvement in the sector – then the sector got waylaid by Covid-19. Instead of bailing out the insiders really kicked their share buying into overdrive as you can see at the far right of Figure 2.
Figure 3 displays ticker XLE with an indicator that I developed by simply smoothing Larry Williams VixFix indicator. The gist of the idea, is that when this indicator reaches an extreme high level and then turns down, it often highlights a “washed out” situation which may be followed by a bullish move. Ticker XLE is presently nearing that point.
EDITTORS NOTE: VixFix smoothed indicator code sections can be copied and pasted into EDS or you can download the indicator code in an EDS file from here and save it to your /wintes32/EDS Strategies folder.
This indicator is based on another indicator called VixFix which was developed many years ago by Larry Williams.
hivalclose is hival([close],22). <<<<<The high closing price in that last 22 periods
vixfix is (((hivalclose-[low])/hivalclose)*100)+50. <<<(highest closing price in last 22 periods minus current period low) divided by highest closing price in last 22 periods (then multiplied by 100 and 50 added to arrive at vixfix value)
vixfixaverage is Expavg(vixfix,3). <<< 3-period exponential average of vixfix
vixfixaverageave is Expavg(vixfixaverage,7). <<<7-period exponential average of vixfixaverage
Should savvy investors follow the insider’s lead and start piling into the energy sector? Unfortunately, hindsight is the only way to know for sure. But for what it is worth, my own answer is “probably, but maybe not just yet.”
Energy Seasonality
The primary reason for hesitation at this exact moment in time is seasonality. Let’s use ticker FSESX (Fidelity Select Sector Energy Services) as a proxy for the broader energy index. This fund’s first full month of trading was January 1986. Figure 4 displays the cumulative total return for ticker FSESX ONLY during the months of June through November every year since 1986.
Figure 4 – FSESX cumulative % return June through October (1986-2020)
The cumulative total return during these months for holders of FSESX during June through November is -94.7%(!!!) So, you see my hesitation with “piling in”.
Additionally – climate change concerns aside – much of the energy industry still revolves around crude oil. Figure 4 displays the annual seasonal trend by month for crude oil.
Seasonal trends can vary widely from year-to-year, and there is NO guarantee that trouble lies ahead in Sep-Oct-Nov for the energy sector.
But that is what history suggests.
Summary
The bottom line is this:
*Energy sector corporate insider buying should be seen as a bullish longer-term sign for the sector
*The energy sector is so beaten down, battered and unloved that it probably accurate to refer to the situation as “Blood in the Streets”
Based on these factors I look for energy to surprise investors in the years ahead. That being said:
*Trying to pick the exact bottom in anything is typically a fool’s errand
*Getting bullish on the energy sector in early September is at times fraught with peril.
Sometime around December 1st it will be time to take a close look at the energy sector. If an actual uptrend develops or has already developed, the time may be write for investors to join the insiders.
Jay Kaeppel
Disclaimer: The information, opinions and ideas expressed herein are for informational and educational purposes only and are based on research conducted and presented solely by the author. The information presented represents the views of the author only and does not constitute a complete description of any investment service. In addition, nothing presented herein should be construed as investment advice, as an advertisement or offering of investment advisory services, or as an offer to sell or a solicitation to buy any security. The data presented herein were obtained from various third-party sources. While the data is believed to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Past performance is no guarantee of future results. There is risk of loss in all trading. Back tested performance does not represent actual performance and should not be interpreted as an indication of such performance. Also, back tested performance results have certain inherent limitations and differs from actual performance because it is achieved with the benefit of hindsight.
The Expert System in TradingExpert Pro gave a 1 – 99 down signal on the Dow Jones on 8-27-20. The market internals based on the advancing vs declining issue in the New York market continue to diverge from the market price action.
The phase indicator used to confirm Expert Ratings turned down on 8-31-20. We usually look for a phase confirmation of an Expert Rating to occur within 3 days of the rating.
The changes made in the constituents of the Dow 30 effective 8-31-20
OK, first off a true confession. I hate it when some wise acre analyst acts like they are so smart and that everyone else is an idiot. Its offensive and off-putting – not to mention arrogant. And still in this case, all I can say is “Hi, my name is Jay.”
A lot of attention has been paid lately to the fact that AAPL is essentially swallowing up the whole world in terms of market capitalization. As you can see in Figure 1, no single S&P 500 Index stock has ever had a higher market cap relative to the market cap of the entire Russell 2000 small-cap index.
Figure 1 – Largest S&P 500 Index stock as a % of entire Russell 200 Index (Courtesy Sentimentrader.com)
So of course, the easiest thing in the world to do is to be an offensive, off-putting and arrogant wise acre and say “Well, this can’t last.” There, I said it. With the caveat that I have no idea how far AAPL can run “before the deluge”, as a student of (more) market history (than I care to admit) I cannot ignore this gnawing feeling that this eventually “ends badly.” Of course, I have been wrong plenty of times before and maybe things (Offensive, Off-Putting and Arrogant Trigger Warning!) “really will be different this time around.” To get a sense of why I bring this all up, please keep reading.
In Figure 1 we also see some previous instances of a stock becoming “really large” in terms of market cap. Let’s take a closer look at these instances.
Could AAPL continue to run to much higher levels? Absolutely
Do I still have that offensive, off-putting and slightly arrogant gut feeling that somewhere along the way AAPL takes a huge whack?
Sorry. It’s just my nature.
Jay Kaeppel
Disclaimer: The information, opinions and ideas expressed herein are for informational and educational purposes only and are based on research conducted and presented solely by the author. The information presented represents the views of the author only and does not constitute a complete description of any investment service. In addition, nothing presented herein should be construed as investment advice, as an advertisement or offering of investment advisory services, or as an offer to sell or a solicitation to buy any security. The data presented herein were obtained from various third-party sources. While the data is believed to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Past performance is no guarantee of future results. There is risk of loss in all trading. Back tested performance does not represent actual performance and should not be interpreted as an indication of such performance. Also, back tested performance results have certain inherent limitations and differs from actual performance because it is achieved with the benefit of hindsight.
You may have seen some of the articles out there analyzing the skewed nature of the current market rally. As Joe Bartosiewicz in his August 8 Bartometer pointed out:
“The Top 15 Stocks in the S&P 500 account in Market Value 35% of the entire S&P 500 stock market. The Bottom 420 Stocks in the S&P 500 account in Market Value 33.8% of the entire S&P 500 stock market. This means that 15 stocks are controlling the entire S&P 500..”
The Dow Jones 30 index uses a price weighted criteria as part of it’s calculation, and also includes Apple; AAPL has more than doubled in price in under 5 months.
Given that there appears to be only a small basket of stocks leading this rally, we had a look back at the last time tech related stocks were driving the market higher; the dotcom bubble that ran through the 90s into the early 00s.
Monthly DJIA and MACD – left through 3/2002 – right through 10/2002
The first chart is a monthly of the Dow 30 with MACD indicator comparing the market 03/29//2002 as the dotcom bubble rolled over vs 7 months later. Students of divergence analysis, will tell you that MACD in late March 2002 clearly showed prices should be much lower still despite the @33 % rally from the September 2001 low. By late October 2002 the market had fallen again by @33%. At that time the market was close to @40% lower than the high at the start of 2000.
Monthly DJIA and MACD – left through 3/2002 – right through 8/2020
The second chart is a monthly of the Dow 30 on the right through 8/10/20 vs the rally peak of 03/29/2002. The current market has had a @50% rally from the low at the end of March 2020. The original correction was @37% from high to low, slightly bigger than the dotcom correction. The MACD, similar to 2002, is strongly diverging.
The decline in 2002, after the rally, took prices lower than the the prior bottom. If a similar pattern happens this time and the decline is @40% from the high of 29568, the Dow would at the 17700 level.
Yet more Power tools in your WinWayCharts plus a session on why you should use color studies in Charts
Thursday July 2, 2020 at 14:00 – 15:45
Part 1. Power tools in your WinWayCharts
An hour long session with UK Director Ray Foreman covering the power features in your WinWayCharts platform – great for new clients or those with more experience.
Part 2. Why you should use color studies in Charts
Steve Hill, founder of WinWayCharts will guide you through the powerful color studies tool in Charts and how you can take the indicators you already use and make them show signals on the price charts.
English