A look at the energy sector for a rotation «
Since the second leg of the rally in mid December, low-beta, higher-yielding names have lead this rally until just recently. We have been hearing from a top Wall Street strategist over the last couple of weeks that the historical mean spread between defensive and cyclical sectors would realign, making for nice upside potential for cyclical stocks.
To get this market moving higher, we hear everyone talk about a rotation into cyclical stocks, and we are starting to see evidence of this theory.
Since our first column, we have said the market was not overbought, even with the S&P 500 2.4 standard deviations above its 50-day moving average. If you were to look at the common technical indicators like the relative-strength index (RSI), you would have missed the last 20 or 30 S&P 500 points. Looking at the same common indicators will not provide an edge, as we have mentioned.
On the chart linked to below, we have provided a sector breakdown based on our proprietary algorithm, showing a breakdown of the strongest and weakest sectors.
On the surface, you will see the obvious, that utilities and consumer staples are the strongest sectors. However, if we look at the granular details, we will see that energy has gained the greatest strength this week, while utilities have weakened the most. On May 5, we saw an unusual change in the energy sector that has historically lead to increased pricing.
You will also see a heat map that will show the strongest to weakest industry groups within the energy sector. Currently, the oil and gas pipelines is the strongest industry, followed by major integrated oil and gas, respectively, then oil and gas equipment, and oil and gas refining and marketing.
Below the heat map are specific stocks you might want to watch within the energy sector. Starting from left to right based on our algorithm are the strongest to weakest energy stocks.