by Michael A. Gayed | March 21, 2012 10:55 am
“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.
Click to Enlarge 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.
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