This Sector is Getting Back to Its Bullish Way
"When the facts change, I change my mind - what do you do, sir?"
- John Maynard Keynes
This quote applies to one sector of the market that's ready to break into a renewed bullish trend based on a change in the facts.
First the facts, or at least the data.
Data over the last three months has continued to show improvements in the economy.
Inflation, GDP, and now consumer confidence (yesterday morning) have all come in better than expectations. The message, perhaps we are going to have a soft landing?
Frankly, I don't know...
What I do know is that oil and the Energy Select Sector SPDR Fund (XLE) is springing back to life.
The financial media has been buzzing today as Crude Oil prices crossed above $80 for the first time since April.
That's good, but there's something better.
There's another "first" that I'm more concerned about. This is the first time since December 2020 that Oil has crossed above its long-term 200-day moving average (MA200) with strong short-term technicals supporting the move.
I'm on record over the last nine months for being bearish energy.
The reasons were simple.
The Fed was fighting inflation. That's historically bearish for commodities.
The economy was heading toward a recession. Again, historically bearish for commodities.
The Energy sector was the most crowded of all sectors after 2021. Another bearish mark.
The first two of those three have changed.
As of today, 65% of the analyst "buy/hold/sell" ratings are buys continue to reflect the energy sector as the most recommended by analysts. To put that into perspective, the buy ratings on the Nasdaq 100 sits at 63%.
The difference between the two is performance and the potential of a sector rotation.
As expected at the beginning of the year, oil and energy stocks saw increased selling. The powerful combination of being an overcrowded trade combined with poor price activity to cause an exit from these companies.
At the same time, the Nasdaq 100 has rallied higher on the back of Artificial Intelligence AND a sector rotation out of energy. That's the key.
Here's what it looks like when you monitor the relative strength of energy (XLE) to tech (using the QQQ).
A large sector migration from energy combined with the allure of Artificial Intelligence drew cash from energy. That cash ran into the Nasdaq 100, which is now showing its own signs of being once again crowded.
With oil breaking into a new bullish trend, the energy sector - including SPDR S&P Oil & Gas Equipment & Services ETF (XES) and SPDR S&P Oil & Gas Exploration & Production ETF(XOP) - are set to make a renewed bull run worthy of a new allocation.
Here's what I'm watching and how I'm trading it.
The XLE is the heart of the trade. A break above $$87 will take out April's highs and provide an increase in buying pressure as the sector garners more attention from the bulls.
A successful test of the MA200 on any pullback will charge this sector higher with additional velocity as the technical strength would be confirmed.
I'm targeting a move to $95 over the next 4-6 weeks as the United States Oil ETF (USO) charges its way back toward $90.
As already mentioned, the XES is along for the ride here and typically acts as the "tip of the spear" for higher and lower prices when oil is involved in a momentum move.
We'll look at one of the "Best in Breed" companies in the Oil Services sector on Wednesday.
About the Author
Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.