Is the Carnage That Hit Housing Ready To Pounce On Oil?

|
Includes: APC, OIH, USO
by: Dan Carty

Early yesterday morning, I was examining the earnings of several oil service companies. I am finding many that are cheap relative to this and next year's expectations.

For example, Anadarko (NYSE:APC) is expected to earn around $6.25 in 06 and $8.50 in 07. These are solid numbers placing the PE in the 6-7x earnings range. Others trading in similar ranges with similar to lower growth levels and the industry is not losing money by any means.

So if one compares the oil stocks to the housing stocks, are they nuts? Not necessarily. Sure, earnings growth is negative year over year for the homebuilders while at least flat for those in the OIX but the prices of these companies have stabilized over the past month thanks in large part to the fall in long rates (and the pause by the Fed).

The OIX members on the other hand have rising earnings and are now just seeing slowing demand growth both domestically and globally. The price of crude has collapsed ever since the Fed took their foot off the accelerator by pausing. It is as if these two markets are working opposite each other.

So perhaps this is an inflection point. As demand falls from the crude market, the carnage that hit the homebuilders this year could be ready to pounce on the OIX. The top in the homebuilders in 2005 was a shaved top using candle charts from an elevated position (but not overbought). The OIX had the same shaved top confirmed last month from an overbought position. Predictably, the stocks dived through September.

While there is much more to this analysis than using the variables mentioned, I figured it was worth thinking about at least and if the homebuilders are a perfect indicator, then owning the OIX over the next year could be something that hurts your portfolio.

Read more about the housing and energy sectors including our coverage of the energy ETF's (NYSEARCA:OIH) and (NYSEARCA:USO).

Comment on this article.