ETF Update: How to Play the Energy Sector

We often comment about the market, and sometimes about individual stocks. We always pay attention to market sectors. A sector approach helps one to find what is working, even in a range-bound market.

We study sectors continually, looking at the charts and ratings of hundreds of ETF's. Each week we provide a list of our top-rated sectors for the next thirty days, along with some of our current observations. ETF investors can check out the list and compare our findings with their own conclusions.

In our analysis, we consider Trends, Cycles, and a bit of Anticipation. Since we apply the model to nearly 300 ETF's, we call it the TCA-ETF system. (For new readers, there is a more complete description of our methods at the end of the article. We also have a free report with more detail on the system and results, available on request.)

The Macro View

From an overall market viewpoint, our indicators have moved into positive territory. The key elements are as follows:

• We now find 98% of our ETF's in positive territory (71% last week). The average strength rating for the overall list is 43, up from only 7 last week. (A score of "0" implies the average long-term ETF expectancy.)
• 24% (down from 875) of our sectors are in the "penalty box." This means that they are currently disqualified from the buy list for technical reasons. You can think of this as a sophisticated "stop loss" rule, often applied in advance.
• Our index package is positive. For this rating we look at the ETF's (both long and short) for the S&P 500, the Dow, and the Nasdaq. You can see these ratings in the results table for this week.

Spotlight On Oil Services

This week our sector spotlight features oil service stocks. The SPDR S&P Oil & Gas Equipment & Services ETF (XES) is a highly-rated current holding in the energy sector. The fund has a P/E ratio of under 14 and a price to book of 1.57. Price to cash flow is below 6. Since XES is based upon an equal-weighted index, there is excellent diversification within the sub-sector. Each holding is about 4% of the fund.

The current chart (click to enlarge) shows what our model has identified -- a breakout past old highs after a long period of basing. While no guarantee comes with a chart pattern, our research shows that risk/reward in these situations is very attractive.

XES moved rapidly up our rankings, into 5th place from 136th. The iShares ETF (IEZ) is a similar holding that we added on Friday. The Market Vectors Russia Trust (RSX) also has a strong correlation with oil.

Expert Commentary

With oil prices range-bound, there has not been much recent excitement about oil services.

Dian L. Chu, in a nice overview of near-term energy prospects, concludes as follows:

...(W)ith crude prices hovering around the $70 per barrel range, even with reduced demand, oilfield services remains one of the more promising sectors still with room to grow.

She also has a useful discussion of some individual companies and oil pricing factors.

There is also a good discussion of fundamentals at Blogging Stocks. Steven Halpern writes the following:

"The oil-services sector remains my favorite long-term play in the energy industry," says sector specialist Elliott Gue. In The Energy Strategist, the advisor looks to industry-leader Schlumberger (NYSE: SLB).

Gue explains, "Oil services firms will benefit directly from the increasing technical complexity of oilfield development. International business is the primary driver for Schlumberger, which generated only 22% of its revenues from North America in 2008.

The article continues with an analysis of energy and oil service cycles. It is well worth reading.

Weekly TCA-ETF Rankings

We had a gain of about 1.5% last week, trailing the S&P 500 by about one point, most due to dollar strength.

As noted above, all of the macro market indicators have improved significantly in the last week. Based upon the current model signals, we have switched to a bullish position in the Ticker Sense Blogger Sentiment poll.

Here are the top sectors from our expanded universe of 277 ETF's (click to enlarge). The list also includes the values for the broad market ETF's and their inverses.

Note for New Readers

Our weekly ETF Update is designed to assist both investors and traders interested in ETF's and Sector Rotation. Before turning to the current rankings, let us undertake a review for readers new to this series.

Our Method. In this past article, we described our basic methodology and why we believe the rankings are useful for fundamental traders and technical traders alike. While we urge readers to check out the entire article, the key point is that ETF's pose challenges and opportunities different from investment in individual stocks. The fundamentals may be more difficult to assess. Even with a good grasp on fundamental trends, there is a lot of technically-based trading in ETF's. This means that those trading with a fundamental approach (and we do this as well) want to monitor the "hot money" moves. Here is an article on that point.

The system synopsis. We look at Trending sectors, Cyclical Sectors, and build in an element of Anticipation for both entry and exit -- thus the name of the model, TCA-ETF. While we do not reveal the exact methodology for spotting trends and cycles, the system is not a "black box." The basic elements are used by many, and widely reported. We even discuss the need for human analysis as opposed to black box trading.

We report the rankings each week, now on the weekend with a one-day delay, using the Thursday output from the model. We monitor and trade this daily, and offer a free report (request via the email address on the top left of the site) for those interested in our weekly trading program.