Energy Stocks in Downtrend While Crude Hits New High and the Utility Sector Turns Positive in a Bull Market……Unusual Sector Moves and How to Play Them.
For the most part, the markets tend to act in a fairly predictable way. Rising interest rates boost Bank and Insurance stocks, hints of an increase in military spending boost Defense-related stocks, and the possibility of lower corporate taxes helps the entire market. Adding to that and important to my work – companies that report strong earnings go higher.
That said, these typical correlations don’t always play out as expected and as seasoned investors will tell you, the minute you think the markets are predictable, it’ll throw you a curve.
With that in mind, let’s take a look at the current Energy market. Normally, as crude oil prices go higher in price, energy stocks will trade higher. Not so now. Crude oil prices hit a new 1 year high in price yesterday and you wouldn’t know it by looking at the S&P Energy Sector Chart. (see below). While there has been talk of an oversupply of inventory, in the past the price of crude has overridden these concerns.
So maybe Energy stocks had a poor earnings season? Not the case as this earnings season has been quite positive for this group. Over 56% of Energy companies have reported earnings and sales that were above estimates. Even more impressive, half of the top ten S&P 500 companies with the highest upwardly revised earnings estimates for the 1Q17 are Energy companies.
As you’ll see in the chart below, the Energy sector has been in a downtrend with its key 10 and 50 day moving averages trending lower. This makes for a heavy pattern as the upside resistance gets lower and lower while these moving averages continue to decline.
Things may get brighter for this group soon as recent inventory reports point to less oil reserves than speculated. Healthy earnings reports and high crude prices as a backdrop point to a reversal that may be impressive. The chart below highlights the signals you’ll want to see that will alert you to a turnaround in the Energy sector.
Now let’s review the normally defensive Utility sector. As many of you know, given the high dividends of stocks in this group, Utility’s do well when the broader markets are doing poorly. Given that we’re in a strong bull market, it’s surprising that this sector has turned technically positive. (see below) Adding to the surprise is the fact that Utilities had a weak showing during the recent earnings season.
As you’ll see in the chart below, the S&P Utility Sector has broken above both its 50 and 200 day moving averages and the RSI and MACD are both positive. While interesting from this point of view, one economically driven reason these Utility stocks are doing well is tied to the increased demand in electric and gas in newer communities. Companies such as Centerpoint Power (CNP) have seen a huge increase in demand as real estate development in the areas they serve continues to pick up.
All said, while these developments are interesting, we at MEM Investment Research will continue to focus on the high quality growth companies that are reporting strong earnings and sales and that are poised to outperform the markets.
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Mary Ellen McGonagle
MEM Investment Research