Energy’s Not Attractive Despite High Oil

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“I believe in the power of weakness.” — Pat Buckley

With oil prices remaining in the triple digits and fear over the potential for further escalation of tensions in the Middle East, energy stocks should be a great place to invest. Yet price action, despite multiple bullish arguments, remains muted — stocks in the sector appear to be diverging from what investors think should be happening.

Take a look below at the price ratio of the iShares Energy ETF (NYSE:IYE) relative to the Dow Jones Industrial Average (DIA). As a reminder, a rising price ratio means the numerator/IYE is outperforming (up more/down less) the denominator/DIA.


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I’ve annotated the chart to show that the ratio peaked in March of last year and has been in a broad period of weakness since then despite brief periods of leadership.

While February was a strong month for the sector as oil prices suddenly rose, the recent breakdown coincides with China’s lowered growth target and the general idea that infrastructure building in emerging economies is about to enter a slower-growth phase. This in turns lowers expectations for commodity demand going forward.

There is perhaps a more interesting scenario that could play out. If energy stocks are unable to resume sustainable leadership, that allows for money to chase better-performing areas of the market. The sector that has been most notable since the start of this year has been financials.

If money that would normally bet on rising stocks through the energy sector looks elsewhere, financials would seem to be the natural place to go. This in turn would send a strong message to market participants that the financial crisis is nearing its end on a global basis for now.

The Lead-Lag Report is provided by Lead-Lag Publishing, LLC. All opinions and views mentioned in this report constitute our judgments as of the date of writing and are subject to change at any time. Information within this material is not intended to be used as a primary basis for investment decisions and should also not be construed as advice meeting the particular investment needs of any individual investor. Trading signals produced by the Lead-Lag Report are independent of other services provided by Lead-Lag Publishing, LLC or its affiliates, and positioning of accounts under their management may differ. Please remember that investing involves risk, including loss of principal, and past performance may not be indicative of future results. Lead-Lag Publishing, LLC, its members, officers, directors and employees expressly disclaim all liability in respect to actions taken based on any or all of the information on this writing.

Michael A. Gayed is the Publisher of The Lead-Lag Report, and Portfolio Manager at Tidal Financial Group, an investment management company specializing in ETF-focused research, investment strategies and services designed for financial advisors, RIAs, family offices and investment managers.

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Article printed from InvestorPlace Media, https://investorplace.com/2012/03/energys-not-attractive-despite-high-oil/.

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