Back in mid-December I wrote that the energy sector was approaching overbought. Since then it has added another 12% and reached the extremes that I suggested it was nearing. Since Rydex has two specialty sector funds I thought I would combine them to get a full picture of the retail excitement for this sector:
The energy sector has risen appx. 131% since the cyclical low in March 2009 with the majority of that arriving in a furious climb over the past few months. The total assets in the Rydex Energy Sector and Energy Services sector funds (aggregate) have almost quadrupled as retail investors have rushed in with more and more excitement to ride the momentum. And to follow up another analysis I mentioned with regards to the assets in the Rydex Energy ETF, its NAV has gone up an additional 6.6% since I wrote about it but the total assets have gone up an additional 17%.
Helping all of this is the fact that crude oil is getting a lot of bullish notice these days. We have the nice round target of $200 suggested by Jim Rogers. And we just had the revelation from WikiLeaks that Saudi Arabia’s reserve numbers are about as inflated as Kanye West’s ego – according to Sadad al-Husseini, the geologist and former head of exploration at the Saudi oil conglomerate, Aramco. The inflation of reserves by Saudi Arabia is something that we’ve been hearing about for several years now from different sources so it isn’t earth shattering news. But it is important to remember that major tops are formed with the help of positive news and major lows are carved out of misery and desolation.
To see what I mean, we don’t have to go any further than the “ultimate contrarian” call I made on BP a few months ago. At the time there were rumors swirling of the company’s demise, its liquidation, or at least, garnishments of its dividends to pay for the Mexican Gulf oil spill disaster.
Fast forward to today and BP’s stock (BP) has recovered more than 70%. Exxon Mobil (XOM) – the largest capitalization public stock in the world – is also back on top once again. Its shares have risen about 45% since their lows last summer. Being the bellweather for the sector, it is important to monitor how it is trading. The rise has taken the share price back up to prior resistance and the relative distance from its 200 day moving average is also stretched to the breaking point:
Historically, when XOM gets pushed up 20% or more above its long term trendline, it either pauses, entering into a consolidation pattern or it corrects and retraces those gains. Right now the stock is trading at 20% – after reaching a recent peak of 23% in early February 2011.
As well, we have to consider that sentiment towards crude oil is very elevated right now. All the stocks in the sector are trading above their 200 day moving average and 84% are trading above their 50 day moving average (and have been for some time). The CoT report shows retail future traders being crazy long while commercials are taking the other side – both at a multi-year extreme.
One caveat is that the bullish percent index for the energy sector is still not giving us an extreme reading. The current 80% is a tad short of the 90% that has historically accompanied major tops in the sector.
Sectors take turns being the stars of the bull market. According to research by Ned Davis, it is very rare to find a sector that gets a repeat performance. Since the start of the bull market, this sector – as measured by the Oil Services HOLDRs ETF (OIH) – has been among the best performing sector with a 140% return while the S&P 500 index has returned 100% (so far). No one knows what sector will come out ahead next but we do know that the probability that it will be energy related is very low.