Sector of the Month: Energy

The S&P 500 Energy sector is up 11% this month, double the return of the next best sector. Those of you who’ve followed Means to a Trend over the last year and a half are familiar with Energy’s track record: it’s been a serial laggard since 2008. Here’s how the sector has performed vs. the broader index over the last few decades.

In January 2020, Energy’s value relative to the S&P 500 dropped below the 1999 lows and accelerated. When the price of crude oil fell to negative $40 in April 2020, it seemed things couldn’t possibly get any worse. But they did. As the Information Technology sector led stock indexes on a breathtaking rally from recessionary lows in March, to new all-time highs in September, Energy was busy falling to multi-month lows.

Since the end of October, though, Energy is on track to turn in its best relative 3-month performance in at least 30 years.

At the same time, the sector (on an absolute basis) has managed to recapture its 2008-2009 low, a key level that it lost early last year and failed to hold during the initial bounce.

Similarly, battles rage with the 2008-2009 lows in 3 of Energy’s 5 sub industries. Here are the Integrated, Equipment & Services, and Exploration & Production groups approaching the key resistance level.

Meanwhile, the next challenge for the Refining & Marketing sub industry is the 2007 highs. Notably, the early 2020 lows occurred right near the 38.2% retracement from entire 2007-2008 decline.

Fibonacci levels have been a helpful roadmap for the Storage & Transportation sub industry as well. The initial rally from last year’s lows failed near the 61.8% retracement from the 2008-2009 decline, but then held the 38.2% on a backtest. The group has recovered, and the next major resistance is a level that was constant trouble from 2016-2019.

Despite all the progress, prices for the sector and each of its industry components are stuck below long-term moving averages. It’s hard to have confidence they’ve escaped their multi-year downtrends. Still, every long-term reversal starts with a short-term rally. With another 3 months like the last, Energy could find itself back in the limelight once more.

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