Energy, value, and support

03/23/21
  • Last week broke a six-week streak of positive energy sector returns
  • Crude oil prices bounced after sharp pullback to support
  • Continued tailwinds from rotation into value stocks?

One of the primary themes of the recent rise in long-term interest rates has been a heightened focus on the rotation out of tech and into value stocks—that is, out of companies that could underperform in a higher-rate environment and into those that traditionally benefit from it.

The following chart provides a snapshot of that dynamic over the past seven weeks or so, highlighting the stagnation of the Nasdaq 100 (NDX) tech index vs. the gains in the energy sector:

Chart 1: May WTI crude oil futures (CLK1), Nasdaq 100 (NDX), Chevron (CVX), Halliburton (HAL), 1/28/21–3/22/21. Criteo (CRTO) price chart. Energy throttles back.

Source: Power E*TRADE


Even after pulling back last week, energy—represented here by Chevron (CVX), Halliburton (HAL), and May WTI crude oil futures (CLK1)—has trounced the flat NDX.

Energy wasn’t alone in retreating, though. The two other top-performing S&P sectors over the past six months, financials and industrials, also finished toward the bottom of the pack last week, even as the Federal Reserve held its ground in minimizing the potential inflationary threat reflected in rising bond yields.

That’s potentially significant, because as some analysts have argued, if the Fed stays true to its word and allows inflation to heat up more than it has in the past before hiking rates, value stocks could remain positioned to enjoy one of their most conspicuous recent tailwinds.1 One possible implication of that outlook is that pullbacks in value stocks could, until conditions change, represent buying opportunities for bulls.

For the energy sector, though, the value theme is only one part of the story: The first chart highlights the typical correlation between oil and the stock prices of companies that pump it out of the ground, refine it, and sell it.

The following chart isolates crude oil’s recent price action, showing that last week’s plunge dropped the market to a support level defined by its late-February and early-March swing lows (roughly $58.50–$59.50):

Chart 2: May WTI crude oil futures (CLK1), 1/28/21–3/22/21. May WTI crude oil futures (CLK1) price chart. Pullback to support.

Source: Power E*TRADE


After a strong bounce on Friday, crude oil held its ground yesterday, mostly trading around breakeven for the day.

While interest rates and value-stock bullishness may continue to command much of the market spotlight, experienced energy sector traders will likely be keeping a close watch on oil to see if its support level lives up to its name.

Market Mover Update: Something was popping in Jack in the Box (JACK) yesterday—call options volume was more than 21 times average in the first 30 minutes of trading, placing JACK at the top of the LiveAction scan for heaviest call volume. But it may have been a trader rolling a position forward, as 1,500 contracts of the May $130 calls were liquidated and a similar number of June $125 calls appeared on the board. The stock, which broke out of a consolidation last week, was trading around $116 at the time—down for the day, but up more than 25% for the year.

Today’s numbers (all times ET): Current Account (8:30 a.m.), New Home Sales (10 a.m.), Fed Chairman Jerome Powell and Treasury Secretary Janet Yellen testify before Congress (12 p.m.).

Today’s earnings include: Adobe (ADBE), GameStop (GME), Paychex (PAYX).

Today’s IPOs include: Universe Pharmaceuticals (UPC), Movano (MOVE).

 

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1 Barron’s. The Market Isn’t Fighting the Fed. What That Means for Stocks. 3/19/21.

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