Below, we see the energy industry equity index monthly cycle is bottoming by yearend. Price may have already hit a low. There have been eight cycle signals in the last year. All four buy signals have been accurate, and three of four sell signals have been profitable. Major lows are typically marked by bearish news and little prospect for an upturn. Jason Goepfert at the valuable SentimenTrader service (SentimenTrader.com) provides some of the best information on the current state of the sector.
XLE Energy Sector Monthly Cycle
Jason’s research shows that:
· The first item concerns the magnitude of the drawdown or difference between the energy sector and the S&P. It is unusual for any sector over the past 90 years to suffer a drawdown that was 35% more than the drawdown in the S&P. The current drawdown in energy is about 60% more than the S&P, the worst of any sector in history. It exceeds the relative losses in tech and financial sectors in their last bear markets. The only other time when energy dropped 35% more than the benchmark was in 1982. This was followed by years of outperformance.
· Some stocks have fallen so much that they trade for book value, rare in current times.
· Companies are cutting employees and have reduced dividends. Active oil rigs collapsed faster than any time in 30 years.
· According to Bloomberg data, there have been just over 300 mergers and acquisitions in the Oil & Gas and Oil & Gas Services industries worldwide over the past six months. This is the lowest in 17 years and has only recently begun to stabilize. Energy mergers accounted for about 1.3% of all M&A activity on average over the past 6 months, the lowest number in 20 years.
· Stocks in the sector have fallen so much that many of them have become cheap by default. Cheap in price, not necessarily valuation. According to data compiled by Portfolio123, out of 663 U.S. listed stocks in the energy sector, 470 of them have a share price under $5. This is down from a peak of nearly 80% in March. No other energy decline in more than 20 years saw more than 65% of these firms with a share price under $5. In the past, when more than 55% of energy companies were below $5, the long-term returns in XLE were positive. There are 390 stocks that have shares that can be purchased at $2.
I bought my first stock in 1966, and these conditions typically appear at bear market lows in any industry.
The difference between the growth and value sectors is at its widest gap in over 100 years. Energy is classified as a value area, so this coming rally is likely to lift the energy stocks as investors flee high-priced and overbought big tech stocks.