Energy Nears (Relative) Support

Global risk assets have suffered worldwide in May, particularly as chatter has grown over Greece leaving the eurozone and as Chinese manufacturing data has continued to disappoint. The decline has not treated all sectors of the stock market equally, however, with commodities and the cyclically sensitive most hurt.

Take a look below at the price ratio of the iShares Dow Jones US Energy ETF (NYSE:IYE) relative to the Dow Jones Industrial Average (DIA). As a reminder, a rising price ratio means the numerator/DIA is outperforming (up more/down less) the denominator/DIA.
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I noted here on InvestorPlace that weakness looked to remain intact given the downtrend that was then just getting started, and which has continued to hurt investors betting on the sector.  Oil prices and commodities generally have performed poorly as the global growth story is questioned and in the face of a strong U.S. dollar.

However, the ratio is now around the support levels of 2010, after which strength returned following the Fed’s announcement of quantitative easing 2 (QE2).

It’s entirely possible that a strong bounce and period of leadership will return, but more time is needed to reverse the downtrend.  My concern in the past two weeks despite being very bullish on equities for 2012 is that the “mini-correction” I believed we would enter following the first week of April may turn deeper given the recent break in credit markets. (See my segment on CNBC for an explanation of this.

Should a recovery occur in credit markets and the fever break in Europe, energy could very powerfully return to leadership given how poorly it has performed for the last several months. Until some clarity occurs, though, energy is likely a sector to watch first before making any kind of decision.

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