Energy Sector Underperforming Oil Prices

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Includes: BGR, CRAK, DDG, DIG, DUG, ERGF, ERX, ERY, ERYY, FENY, FIF, FTXN, FXN, IYE, JHME, NANR, OIH, PXJ, RYE, VDE, XLE, XOP
by: Bespoke Investment Group

The S&P 500 Energy sector is already down 7.1% year-to-date. That wouldn't be so extreme if the broad S&P 500 were down a similar amount, but the S&P is currently sitting up 5.5% year-to-date.

Below is a chart of the Energy sector over the last two years. 2016 was a comeback year for the sector after a brutal 2015. Up until this week, the Energy sector had closed above its 200-day moving average every single trading day since April 11th, 2016. But as you can see below, that streak has come to an end. Today the sector broke hard below its 200-day.

Normally, the Energy sector tracks movements in the price of oil somewhat closely, but that hasn't been the case recently. The price of oil has held up well throughout this drop in Energy sector prices. As shown below, oil remains above not only its 200-day moving average, but it's also above its 50-day moving average.

The recent divergence between oil and the Energy sector shows up in a chart of the ratio between the two. In the chart below, a rising line means Energy stocks are outperforming the price of oil. When the line is declining, oil is outperforming Energy stocks.

As shown, after a big spike in the ratio from 2014 through early 2016, we've seen the ratio dip lower and lower. Even after the drop, though, it's still well above the range it traded in over a 12-year period from 2002 through 2014. A continuation of the current downtrend would basically mean that Energy stocks are set for further declines or oil is set to rally dramatically.

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