Price Changes Sentiment Again, This Time in Energy Stocks
There's nothing like a good rally off the lows to get investors excited about stocks they hated just weeks ago.
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Almost a month ago, on June 12th, I penned a missive on energy stocks. I wrote about how everyone hated them. Their contention had nothing to do with the business itself. It had nothing to do with the fundamentals. No, these folks didn’t like energy because—wait for it—energy stocks were only three percent of the S&P.
You can read the missive again here, but I railed at the time that these same folks were keen to own rocket stocks and quantum computing, companies with no earnings, no dividends, just big fat market caps because they were hot, but ewww, not energy.
Fast forward to today. Everyone seems to think, Hmm, energy, maybe I should look at energy. There is no mention that Valero VLO—an energy stock, gasp!—is up 48% from the low. And it has a 3% yield. Marathon Petroleum MPC is up nearly 60% from the low. Its yield is 2%.
One reason I liked energy in late May was because the ratio of OIH to XLE was making higher lows. I always like it when the higher beta stocks of the group outperform the lower beta ones. I have my eye on that 2.9 area because the ratio really needs to get over that. Otherwise, this will start to look like that period from October to January when the ratio could not make a higher high.
In any event, the overall market just did a group rotation on Tuesday. Out with the banks and in with energy. None of the indicators budged. So far, the market is pulling back mildly to relieve the overbought condition and try and change the overly bullish sentiment.
I did see someone note that the Russell is the same price it was exactly four years ago, so I took a look. Sometimes we get so caught up in the day-to-day movements of the market that we forget to take a step back and look at the big picture. Would it surprise you to see that the Russell 2000 (IWM) is trading where it was in 2021?
This brings me to the ratio of the RSP to the SPY. We looked at this before I left on vacation, and it is bouncing from the same level it has bounced from before. It should bounce some more, but similar to the energy ratio above, it needs to get over that little high at .0298 to get anything going.
