Oil vs. Energy Stocks

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Includes: DBO, IYE, OIL, SPY, USO, VDE, XLE
by: Bespoke Investment Group

If you've been following the markets lately, you know that energy stocks have been soaring. As shown in the first chart below, the S&P 500 Energy sector has basically had an uninterrupted trek higher since last August, gaining 50% over this time period. The sector is currently extended well into overbought territory at more than two standard deviations above its 50-day moving average. As shown in the second chart, oil (the commodity) has also been trending higher, but its move has been nothing like the move in oil stocks. Recently oil has moved to the bottom of its trading range.

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After noticing the recent divergence between oil and oil stocks, we decided to take a look at the historical relationship between the two to see how things look now compared with the past. Below is a chart showing the ratio between the S&P 500 Energy sector and oil going back to 1990. When the line is rising, oil stocks are outperforming oil, and vice versa for a declining line. While the ratio has indeed picked up recently, it is still closer to the bottom of its historical range than the top. Does this mean oil stocks can run even farther?

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(Click charts to expand)