Energy has been by far the best-performing sector over the trailing 12-month period.
In October, we witnessed a handful of energy stocks and industry ETFs break higher from bases and reclaim their summer highs.
Without a doubt, these are bullish developments for the space.
But over the trailing month, energy has lost that leadership position and has actually been the worst-performing sector in the market.
Today, we’re seeing a lot of the upside resolutions from last month undercut their former highs and turn into failed breakouts.
So, where do we go from here?
When we look at the relative trends in the energy sector, we get a much different picture than what we’re seeing on absolute terms. Most of them never resolved higher like their absolute trends and simply remain messy, with prices stalling at the upper bounds of their basing patterns.
If we’re going to see sustained outperformance from energy stocks, we need to see them resolve higher relative to the broader market.
From the desk of Steven Strazza @Sstrazza and Grant Hawkridge @granthawkridge
Over the past few weeks we’ve seen a handful of major indexes, like small and mid-caps, resolve higher and kick off a fresh up leg. But breadth has really cooled off since then, as participation has been declining despite the major averages rallying.
This week, we’re finally seeing that weakness show up at the index level -- particularly from SMIDs and cyclicals.
When we were reviewing our breadth charts, we noticed the deterioration in energy sector internals has been particularly bad. Not only is breadth not confirming the new highs from energy stocks… but there are actually some pretty ugly divergences in our new high indicators.
Energy stocks are currently vulnerable, sitting just above their breakout level at former resistance. Considering the lack of support from internals, this group is on failed breakout watch.
Let’s take a look under the hood and discuss what we’re seeing.
Energy has been coiling in a continuation pattern above its year-to-date highs around 56 for over a month now. You can see this in the upper pane of this chart:
From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
TIPS versus Treasuries is one of the most important charts we’re watching right now, as it's hitting its highest level since early 2013. Relative strength from TIPS hints that investors are positioning themselves for a sustained surge in inflation.
This makes sense given both the five- and 10-year breakeven inflation rates have reached their highest levels in more than a decade.
Key Takeaway: Bullish sentiment is on the rise. The bears may be reluctant to leave the party, but the bulls squarely outnumber their counterparts. The AAII survey shows bulls exceeding bears by two-to-one, and the II bull-bear spread is back within a high optimism zone. At the same time, options markets reveal that volatility and fear are being replaced by complacency. Though optimism has risen sharply during the past few weeks, current levels do not present risk. However, problems may arise when the lofty expectations associated with the sentiment backdrop are not met.
Sentiment Report Chart of the Week: Risk On Buffett Lacking Calories
When investing in the stock market, we always want to approach it as a market of stocks.
Regardless of the environment, there are always stocks showing leadership and trending higher.
We may have to look harder to identify them depending on current market conditions... but there are always stocks that are going up.
The same can be said for weak stocks. Regardless of the environment, there are always stocks that are going down, too.
We already have multiple scans focusing on stocks making all-time highs, such as Hall of Famers, Minor Leaguers, and the 2 to 100 Club. We filter these universes for stocks that are exhibiting the best momentum and relative strength characteristics.
Clearly, we spend a lot of time identifying and writing about leading stocks every week, via multiple reports. Now, we're also highlighting lagging stocks on a recurring basis.
Wednesdays are becoming my favorite trading day of the week.
What the heck is so special about Wednesday? Well, nothing really. But it's the day when all the All Star Charts analysts converge on a weekly internal zoom call and throw out our best observations and ideas. We start identifying themes. What's new? What's old? Where aren't people looking? Where are our blind spots? What would have to happen for us to change our view? What's the best music to listen to while charting and strategizing? (I prefer anything instrumental -- no singing).
Now, to be fair, when the nerds start geeking out about currency pair relationships and long-end versus the short-end of interest rates, that's when I pretend to be listening and interested. But when the conversation comes back around to individual stocks, that's when my ears perk up.
So, today, when it came around the horn to me, I mentioned to the guys that I'm really liking this setup in Valvoline $VVV that the team highlighted in their most recent Young Aristocrats report.
