It has been a fantastic earnings season so far, which has also been fantastic for our bullish strategic trades.
The S&P 500 is once again flirting with new all-time highs because, according to FactSet, 80% of the S&P 500 components that have reported earnings this quarter have beaten earnings-per-share (EPS) expectations and 74% have beaten revenue expectations.
Those are great numbers and, with more than 81% of the S&P 500 components having reported, there probably aren’t a lot of negative surprises lurking on Corporate America’s books that could derail the current bullish trend.
However, one sector that has not been enjoying the rally is the energy sector.
Looking at a comparison chart of the 10 S&P 500 sectors tracked by SPDR since the big banks kicked off this earnings season on July 13 in Fig. 1, you will see the following results:
• Financial Select Sector SPDR Fund (NYSEARCA:XLF): 5.26%
• Industrial Select Sector SPDR Fund (NYSEARCA:XLI): 3.73%
• Health Care Select Sector SPDR Fund (NYSEARCA:XLV): 2.95%
• Consumer Staples Select Sector SPDR Fund (NYSEARCA:XLP): 2.41%
• Materials Select Sector SPDR Fund (NYSEARCA:XLB): 1.52%
• Utilities Select Sector SPDR Fund (NYSEARCA:XLU): 1.37%
• Real Estate Select Sector SPDR Fund (NYSEARCA:XLRE): 1.21%
• Technology Select Sector SPDR Fund (NYSEARCA:XLK): 1.17%
• Consumer Discretionary Select Sector SPDR Fund (NYSEARCA:XLY): 0.48%
• Energy Select Sector SPDR Fund (NYSEARCA:XLE): -0.24%
Fig. 1 — SPDR Sector ETFs Daily Comparison Chart Since July 13, 2018
Obviously, financial stocks are riding the most bullish of the waves higher, but all of the other sectors are enjoying some positive momentum as well … all except for energy stocks. They are the only ones that are currently sinking.
The biggest headwind that energy stocks are facing is the pullback in oil prices since early July. As you can see in Fig. 2, the price of West Texas Intermediate (WTI) crude oil topped out just below $75 per barrel in early July and just broke below support at $68 on Wednesday as the Department of Energy (DOE) announced larger-than-expected gasoline inventory builds.
That means there will be less demand for gasoline production, and therefore less demand for crude oil.
Fig. 2 — Daily Chart of Crude Oil
When oil prices are dropping and the expectation for future price increases starts to wane, it’s difficult for energy stocks to keep pace with the rest of the market.
The Bottom Line
If the current trend continues — and we don’t see why it wouldn’t since it’s been able to hold its own even though the Trump administration and China have gone back and forth with new matching $16 billion trade tariff threats this week — the S&P 500 is likely to set a new all-time high in the near future. We wouldn’t be surprised to see some selling materialize at that level as traders look to take some profits off the table, but we don’t think the selling will discourage the bulls.
With volume notoriously thin in August, the bullish trend looks like it’s with us to stay.
You can learn more about identifying price patterns and using them to project how far you think a stock is going to move in our Advanced Technical Analysis Program.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next SlingShot Trader trade and get 1 free month today by clicking here.