Energy’s Low Relative Strength Has Typically Presaged a 24-Month Gusher.
It is probably fair to say that investors in the domestic or global energy patch did not have as good a Thanksgiving as they could have. During this holiday shortened trading week, the energy sectors within the S&P 500, Equal Weight 500, MidCap 400, SmallCap 600, and Global 1200 declined from 9.2% to 18.9%, while their corresponding benchmarks either gained in price or posted minor declines. And if those energy sector returns weren’t bad enough, during the past six months when the S&P 500 Energy sector was down “only” 15.7%, the S&P SmallCap 600 Energy Index cratered by 40.3%. In comparison, their respective benchmarks increased by 7.5% and 3.6%.
The rolling 12-month relative strength (RS) for the S&P 500 Energy Index is currently 80.70, meaning that this sector’s 12-month price change is almost 20% below that for the S&P 500. There have been six times since 1990 that the S&P 500 Energy Index traded at or below its current 12-month RS reading. Over a 24-month timeframe, the S&P 500 Energy Index was positive six of six times and beat the S&P 500 five of six times. It also outpaced the S&P 500 by an average 16.2 percentage points.
And if you think the S&P 500 Energy Index’s trailing 12-month RS looks attractive, the S&P SmallCap 600 Energy Index’s RS appears downright compelling. Since 1995, whenever the S&P SmallCap 600 Energy Sector recorded a 12-month RS that was at or below its current level, the Energy sector outpaced its benchmark by an average of 24.2 percentage points in the following year, and by 81 points in the subsequent two years. Of course there is no guarantee that what worked in the past will succeed in the future, but in my opinion, these low RS levels make Black Friday bargains pale by comparison.
The ETFs that mirror these domestic and global energy sectors are the Energy Select Sector SPDR Fund (XLE, $80, OW), the Guggenheim S&P 500 Equal Weight Energy ETF (RYE, $70, MW), the PowerShares S&P SmallCap Energy Portfolio (PSCE $31 UW), and the iShares Global Energy ETF (IXC $38.18 MW), respectively. According to S&P Capital IQ’s ETF ranking system, “OW” means overweight, MW=marketweight and UW=underweight.
So, there you have it. Domestic and global energy stocks and sectors have taken it on the chin in the past year on worries surrounding global economic growth and oil supply. And while it’s too soon to say that the end of the concern is behind us, (as well as the resulting pressure on oil prices), it may be time to begin thinking about increasing exposure to domestic and global energy sector ETFs, provided you have the patience to wait anywhere from 12 to 24 months.
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