Running Out of Gas: No Love for Energy Stocks - 1/19/2024
Top charts and trade ideas from the Energy sector
Long-term resistance for the Energy sector has simply been too much to overcome. We’ve been dealing with the 2008 and 2014 highs for 18 months now, and while the bears haven’t taken outright control here, the bulls haven’t been able to gain any ground either. At some point, maybe we’ll get the long-awaited breakout. Or we might not. In any case, the risk is skewed to the downside as long as this resistance level remains intact.
After a short stint of outperformance for the sector over the summer, we downgraded Energy to Equalweight at the start of October, then took them a notch lower to Underweight at the end of November. It wasn’t so much that we wanted to be shorting Energy stocks. But the opportunity cost of owning something that’s stuck in the mud while the rest of the market is rallying is just too high. The Energy sector on its own is still knocking on the door of its 2008 highs, but compared to the rest of the market? It’s breaking down to new 52-week lows.
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In fact, since the S&P 500 set its bear market lows in October 2022, Energy has been the single worst sector to invest in. It’s fallen 1% over that period, while the SPX has jumped more than 30%.
Fortunately for Energy bulls, we’re about to enter the most bullish seasonal period of the year. Energy has outperformed the rest of the market on average in each February, March, and April since 1990.
But seasonality isn’t gospel. The Energy sector is weak and getting weaker. It’s currently in the ‘Lagging’ quadrant of the daily Relative Rotation Graph, and more importantly, it hasn’t been able to reach the ‘Leading’ quadrant on rallies. There just isn’t much relative strength to be found here.
And below the surface, Energy member trends are weakening. Just 30% of the sector is above a rising, long-term moving average, and more than 80% have dropped below a falling short-term moving average.
There’s no reason to be wasting a bunch of time on stocks in technical downtrends when we’re in the midst of a bull market. We’re keeping our Underweight rating in place. The Energy sector is guilty until proven innocent.
Not all Energy stocks are created equal.