Oil prices have been on the rise again as we enter a period of the year that is historically strong for the energy sector.
While markets continue to be a bit overbought, investors should not yet panic at rising oil prices. Since last summer, oil prices and the market have been closely correlated. What had been viewed by consumers as a "tax" in the past, is now viewed as a sign of increasing demand for gas -- due to economic expansion.Seasonal Strength In Energy
One of the components of our ARTAIS model is based on historical strength and seasonal trends in the market. Currently this portion of the model has been allocated away from technology and into the energy sector.
While not 100% accurate (no model ever is), the seasonal demand for crude oil, rising gasoline prices prior to start of the summer driving season, and seasonally strong first-quarter earnings and cash flows related to the winter heating season have helped the energy sector outperform the market historically.
Note: The model assumes an investment in the energy sector from the last trading day in January to the end of May.(click to enlarge)Seasonal Energy (XLE) In The Current Bear Cycle - Riverbend Investment Management
Compare that to the technology sector during the same time frame:(click to enlarge)Technology (XLK) In The Current Bear Cycle - Riverbend Investment Management
Finally, compare the energy sector to the S&P 500 during the same time frame:(click to enlarge)Seasonal SPX In The Current Bear Cycle - Riverbend Investment Management
Impact On The US Stock Market:
As mentioned above, while rising oil prices were viewed as a "tax" on the consumer in the past, lately rising prices are being seen in a more positive light. The correlation between oil prices and the direction of the S&P 500 has been very strong since 2008.
While the US stock market may remain overbought for some time, I think we will start to see a rotation out of tech and into the energy sector -- especially as investors look to take advantage of the line of massive winter storms affecting most of the east coast.