Why Energy Is Better Than Technology

Throughout 2014 I've tried to maintain a neutral to bearish strategy in the stock market. I'm a much bigger fan of owning bonds and commodities. But within the equities space, there are still opportunities to make money while keeping that neutral position within the asset class.

Today I wanted to share what I think is a great opportunity for the second quarter. As we enter what appears to be the end of the traditional bull market cycle, the late-cycle sectors should outperform the early cycle sectors. Technology tends to lead at the beginning of a bull market cycle, and it did just that off the 2009 lows. But that outperformance came to an end over a year ago. On the flip side, Energy has been underperforming for what seems like forever. But I think we're currently seeing this change.

Here is a longer-term chart of the SPDR Energy Sector ETF $XLE vs the SPDR Technology Sector ETF $XLK. The price of this ratio held what has been support for over 8 years. But more importantly, we're now seeing a breakout above a 6-year downtrend line (solid line). In addition, this ratio is now attempting to break out above a shorter-term 3-year downtrend line (dotted line):

The next chart shows what's happened so far this year on daily time frames. I see a nice bullish momentum divergence on the new lows followed by a quick reversal higher. Just recently we started to break back above that key broken support from the Fall:

It looks like this rotation is here to stay. This is very normal and healthy late cycle behavior. Technology and Financials are early cycle sectors and they continue to underperform the market. It's Energy that's been getting the flow these days. I think we see more of this relative strength going forward.

I'll try to follow up on this week's series of Energy posts. But you can REGISTER HERE to learn more about how to access these charts on a weekly basis.

Tags: $XLE $XLK $SPY $XLF