Getting Technical with Energy ETFs

by: Gary Gordon

Year-over-year, energy stocks are among the worst performers. From April 30, 2008 through April 29, 2009, the major economic segments break out as follows:

Year-Over-Year Performance By Economic Sector
(April 30, 2008 - April 29, 2009)
SPDR Consumer Staples (NYSEARCA:XLP) -20%
SPDR Health Care (NYSEARCA:XLV) -23%
SPDR Consumer Discretionary (NYSEARCA:XLY) -27%
SPDR Technology (NYSEARCA:XLK) -28%
SPDR Utilities (NYSEARCA:XLU) -35%
SPDR Materials (NYSEARCA:XLB) -41%
SPDR Industrials (NYSEARCA:XLI) -44%
SPDR Financials (NYSEARCA:XLF) -59%

Energy and Natural Resources "bulls" might argue that the bursting of the commodity bubble in the summer of 2008 had a disproportionately adverse effect on the demand for "stuff." Consequently, the economic downturn has done cartwheels all over the energy, industrial and materials ETFs.

Fair enough. But what evidence is there that energy is a sector worthy of investing in now? If the global economy will get out of its funk, yet will only show anemic signs of growth in a tepid employment environment, why should we expect much from integrated oil or natural gas exploration or refiners or distributors?

Enter a tool of the technical analyst called the advance/decline line. In brief, it'll give you an idea of whether a majority of stocks are climbing or falling over time.

In understanding a single day, one would need to get the number of advancing stocks as well as the number of declining stocks for a given ETF. Then one would divide by the total number of listed companies to get an Advance Decline Net %. So if the SPDR Select Energy Fund (XLE) has 25 advancers with 20 decliners in a given day, the Advance/Decline Net % would be +11%. [(25-20) / (45) = .11 ]

Of course, one day does not make a long-term trend. But one year certainly might. That's why many technical analysts look for a positive A/D Net% over 250 trading days (one year).

For those who are interested in price breadth (for those who wish to understand which ETFs may be turning the corner for real) a greater number of advancers over decliners for a sustained 1-year period may be valuable info.

Unfortunately, there are no economic segments that currently boast a positive A/D Net% above a 250-day average; that is, until Energy (XLE) recently climbed above the line.

Price Breadth of ETFs Using A/D Net % (250-Day Moving Average)
SPDR Energy (XLE) 1.1%
SPDR Consumer Staples (XLP) -1.7%
SPDR Materials (XLB) -1.9%
SPDR Health Care (XLV) -3.0%
SPDR Utilities (XLU) -3.2%
SPDR Technology (XLK) -3.8%
SPDR Industrials (XLI) -4.6%
SPDR Consumer Discretionary (XLY) -5.5%
SPDR Financials (XLF) -5.6%

To be fair, 1.1% above the long-term A/D trendline may not be monumental evidence that the segment is preparing to advance going forward. Not only is 1.1% on the "smallish" side of a price breadth uptrend, but the SPDR Select Energy Fund (XLE) isn't equally weighted across its 45 index components. In fact, Exxon Mobil alone commands 20% of the movement of the exchange-traded fund.

Nevertheless, one shouldn't entirely ignore price breadth either. With Energy (XLE) and Materials (XLB) being most representative of natural resources industries, we may be witnessing a renaissance in domestic and global demand. And if that's the case, one might indeed expect the stock ETFs to appreciate considerably.