Slick move in energy stocks
02/14/19

●S&P energy sector up more than 12% YTD after brutal Q4

●Latest OPEC pledges give hope to bulls


 

Tomorrow things may be different, but today, call it a classic comeback story.

Year to date, the energy sector (+12%) has trailed only industrials (+16%) in the S&P 500 (SPX). That performance stands in stark contrast to energy’s performance over the past six months, when it ranked dead last, at -13%.

One chart is about all you need to get a handle on the market dynamics at work here:

April WTI crude oil futures (CLJ9) and S&P 500 (SPX), 8/28/18–2/13/19. S&P 500 price chart, April crude oil futures price chart. Stocks vs. crude.

Source: Power E*TRADE


As bad as the late-2018 “risk-off” phase was for the stock market, the chart shows it was even worse for the crude oil market, which dragged oil stocks down with it. It may have been something of a negative feedback loop: A falling stock market helped stoke fears of economic slowdown (or was it the other way around?), which weighed on crude oil (which tends to rally during economic expansions and decline during contractions), which put extra pressure on energy stocks.

That was then, this is now.

Crude’s rebound and the resurrection of the energy sector appeared to get an additional shot in the arm the past couple of days by news of deeper cuts in OPEC oil production, US sanctions on Venezuela (the top South American oil producer),1 and a bullish call on oil from Goldman Sachs.2 The chart above also shows that crude oil pivoted to the upside on Monday after approaching support at its January swing lows.

Many large oil names released earnings in late January or early February, with some missing earnings estimates and others, such as Conoco-Phillips (COP) and BP (BP, chart below), topping them.

BP (BP), 10/31/18–2/13/19. BP (BP) stock price chart. Strong stock in strong sector.

Source: Power E*TRADE


BP is also unique in that it has already broken out above the consolidation that many other oil stocks (and crude itself) are still trying to escape from.

Whether the energy in energy sustains itself beyond recent headlines will likely depend on several factors, including confidence in global economic health (trade talks, anyone?), oil-producing nations maintaining their pledged supply cuts, and avoiding another broad-market meltdown in equities.

The spigot can switch quickly in the oil game, though, so traders need to stay on top of developments in the crude market (including the weekly EIA petroleum status reports) as well as the latest stock developments.

Market Mover Update: Chipmaker Micron Technology (MU) jumped more than 3% yesterday on a big day for semiconductor stocks, while Aerospace and defense stock General Dynamics (GD) inched upward within its recent consolidation.

Higher high, but more fear? While the S&P 500 (SPX) made a new 46-day high and close yesterday, the Cboe Volatility Index (VIX) also closed higher, if just barely. Over the past 20 years, whenever similar days have occurred, the SPX has closed lower the next day 62% of the time. The VIX, which reflects the implied volatility of SPX options and is a widely referenced market “fear gauge,” typically moves in the opposite direction of the SPX. When it closes higher along with equities, it can mean traders are experiencing more fear despite rising prices.

Today’s numbers (all times ET): UK Parliament Brexit debate (vote possible), Producer Price Index (PPI), 8:30 a.m., Retail Sales (8:30 a.m.), Business Inventories (10 a.m.), EIA Natural Gas Report (10:30 a.m.).

Today’s earnings include: Coca-Cola (KO), CME Group (CME), EPAM Systems (EPAM), Incyte (INCY), Quest Diagnostics (DGX), USG (USG), Vulcan Materials (VMC), Waste Management (WM), Brookfield Asset Management (BAM), Applied Materials (AMAT), Arista Networks (ANET), Baidu.com (BIDU), BioTelemetry (BEAT), Cognex (CGNX), LogMeIn (LOGM), NVIDIA (NVDA), XPO Logistics (XPO).

 

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1 Reuters. Oil prices rise 1 pct amid OPEC supply cuts, US sanctions on Venezuela. 2/12/19.

2 Bloomberg.com. Goldman Sachs Says OPEC's ‘Shock and Awe’ Will Drive Oil Higher. 2/12/19.