Energy Stocks Running Out of Gas
In a year that’s offered few places for investors to hide, Energy has been a bright spot. The growth-dominated Nasdaq is down nearly 30%, and bonds are on track for their worst year in at least 50 years. Meanwhile, the S&P 500 Energy sector hasn’t spent a single day in negative territory.
It seems that run of outperformance has come to an end. Crude oil dropped to its lowest level of the year last week, closing near $70 a barrel. That’s 45% below the March highs.
At $70, prices are still well above the average cost of production globally and far above the sub-$40 levels seen just two years ago. That hasn’t kept Energy stocks from falling, though. Energy dropped 8% last week, lagging all other sectors as the S&P 500 dropped more than 2%.
The weakness has occurred at a logical level – the 2014 highs. Following that 2014 peak, both crude oil and Energy stocks entered multi-year downtrends, culminating with negative oil prices in the depths of the COVID crisis.
Needless to say, those 2014 highs are a big deal. And weekly momentum began to weaken as prices approached them. That’s doesn’t bode well for Energy’s near-term future.
Remember, momentum divergences don’t have to mean the end of a trend. More often than not, once the divergence is worked off, the underlying trend continues. Divergences can be worked off in one of two ways: price or time. Prices decline, or they consolidate for a period of time before a new trend begins.
In either scenario, Energy stocks face a tough road before they can reach new highs.
It’s the same story on a relative basis. Energy had outperformed the S&P 500 by almost 200% over a two year period, but weekly momentum failed to confirm the most recent move higher.
In 2020, a bullish momentum divergence marked the end of a 10-year trend. Will a bearish divergence have a similar outcome?
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