Silently Winning
Energy is now the best performing US sector year-to-date. This may catch a lot of people by surprise. I know it did for me. Enthusiasm for the sector has dried up substantially, yet you can argue fears of higher inflation are more intense now than a year ago. The media would much rather discuss the Magnificent 7, or the global stampede into artificial intelligence. I mean, who wants to talk about boring Energy companies when we can review the latest virtual reality headset? I don’t blame them - Technology is fascinating. Discussing the impact of AI on industry can attract an audience. Discussing energy companies that have been around since the late 1800s, not so much!!
Let’s take a look at a few Energy charts:
Equal-Weight S&P 500 Energy (price)
New multi-year weekly closing high and blasting through a resistance level that dates back to June 2022. A mentor of mine would say, “There’s no such thing as a quadruple top!” The sector continues to digest overhead supply, but is forming higher lows in the process. Objectively bullish price action.
Equal-Weight Energy vs. Energy (price)
If energy commodity prices are expected to rise, we’d like to see the equal-weight energy index outperform the market-cap weighted index. This would point to increased participation and strength of trend. Right now, the price ratio is trading above an upward sloping 200-day moving average. The trend is still in favor of rising energy prices.
S&P 500 Energy vs. S&P 500
Q4 2023 saw big relative underperformance from the Energy sector. This year started on the same note - but things changed over the last few weeks. The Energy sector relative to the S&P 500 index is forming new multi-month highs. The ratio is now trading above a well-tested support/resistance zone.
Energy still only accounts for a 3.7% weighting in the S&P 500 Index. It’s crazy to think that only a few decades ago, several top 10 names in the S&P 500 Index were from the Energy sector! Energy commodities and energy companies can be a great portfolio diversifier, especially in today’s world as technology dominates the global equity market.
I’ll end with a chart of the US 10-year Treasury Yield. It’s not just fund manager surveys that are pointing out inflation fears. The bond market agrees with this sentiment. The US 10-year yield rose 23 bps this week - the largest weekly rise since October 2023. If the bond market wasn’t worried about inflation, yields would be moving the other direction!
That’s enough out of me.
SM
Great read🍀
Great read, thank you. It seems like Materials are also making that similar [stealth] relative strength turn. It really feels like inflation may not be as done as some might think.