Investing Update: Is Energy Set To Breakout?
What I'm buying, watching & selling
This week continued the volatile up and down start to August. We’ve seen the winners to start 2023 start to decline a bit.
It’s not a big suprise with the big start 2023 has seen through the first seven months. I had also warned about this type of start to August in the piece that I wrote last week, Investing Update: Why Sentiment Matters.
Temper August Expectations
As August begins, my expectations are quite tempered. We now enter the most bearish time of year. We’ve already seen the S&P 500 dip 2.42% and Nasdaq 3.05% to start the month. August and September are historically the most underperforming months of the year.
If you’re a bull and think this is a pullback that should be bought, then tech is an area that you’d want to look at. Take the SMH (VanEck Semiconductor ETF) SMH 0.00%↑ for instance. It’s seen quite a quick selloff. I still maintain the same position that I do in it. I haven’t sold or added to it.
If you missed the run up, then this may be an entry point you consider. There are a number of other tech names that have also pulled back. I’m not in the buy the dip camp yet. Like I said last week, I feel August and September could be quite volatile.
Inflation Still Hangs Around
I’m tired of talking about inflation. The problem is that it keeps in the news and still has a big importance to the market and the road ahead. It will be a good day when we no longer have to talk about inflation.
Thursday’s CPI inflation number showed the first increase since June 2022. That’s the first YOY increase in 13 months.
Then on Friday the PPI inflation came in higher than expected. It was the first rise in PPI inflation since July 2022.
I wrote a post on August 2nd about the possibility of a reacceleration in inflation. Is Inflation Reaccelerating?
I think this chart that Ryan Detrick shared on what prices have done since January 2020 until now, may be the best visual on how much prices have moved over a variety of categories. The spikes seems to be behind us and hopefully things now level out or even start to come down a bit. I think everyone would welcome that.
Volatility and Drawdowns Are Normal
The chart of the week is this from Charlie Bilello. When you talk about volatility and taking the good with the bad, this shows just that. In 2022, you can see the S&P 500, Nasdaq and major tech stocks all got hammered. Then in 2023, the reverse has happened. They have thrived! But the best part, is the 2022-2023 cumulative return column. This shows just how much you have to gain back when an investment falls.
Volatility and drawdowns are normal. The average intra-year drop is 14.3% You have to expect it. It’s just a part of investing. Then remember that the annual returns have been positive 32 of the past 43 years for the S&P 500.
China Stumbles While the US Thrives
This week illustrated some of the worries coming out of China. Deflation is evident for the first time in two years and that isn’t a great sign for the global economic outlook. Coming out of COVID restrictions, they’re experiencing falling consumer prices instead of rising prices. There was an excellent piece in the WSJ about the impact this could have. China Slips Into Deflation in Warning Sign for World Economy.
Meanwhile the picture in the United States is very different from China at the moment. This is what a steady job market, with under control inflation and a growing GDP is going to do. The macro picture right now for the US is much better than anyone imagined to start the year. The industrial policy of on-shoring critical technology is helping boost manufacturing construction. Think semiconductors, computers and other electronics. Made in America!
What Flows Are Telling Us
Monitoring where money is flowing towards and from is always an important indicator to watch. This chart shows by sector where inflows and outflows are going. Two areas where the outflows are a bit surprising are energy and industrials. I think as we monitor this chart moving forward, I expect these two sectors to start seeing inflows.
My biggest surprise is that tech is still seeing massive inflows. In fact, the inflows into tech are actually starting to accelerate.
Small caps keep ticking upward after experiencing outflows in the 1st half the year. If we see inflation and the 10-year tick downward, that will fuel the talk about cutting interest rates. In that case small caps are going to be a place many rotate towards. It looks like a lot are already positioning for that to come.
Is Energy Set to Takeoff?
Energy has now taken the lead in the percentage of stocks that are above their 50-day moving average. Tech has been falling fast.
In fact, tech is starting to underperform. The Nasdaq has fallen below its 50-day moving average for the first time since March.
Does that mean energy could be the sector where the rotation moves towards? It is sure looking like it could be.
You can see by the S&P 500 sector performance chart that most sectors are starting to dip while energy, which has been an underperforming, starts to spike upward.
If you zero in on the energy sector performance you can really see that they’re all in an uptrend. Especially the oil & gas equipment, service, refining and marketing.
For almost a year we’ve seen energy stocks badly underperform the S&P 500. That could be changing as Tavi Costa’s chart shows. If the stock market is seeing another shift from growth to value rotation, energy stands to benefit. The way this chart looks, it’s already underway.
What I’m Watching
With energy looking to breakout, where do we find opportunity?
First, let’s look at what is going on within the energy complex. Natural gas just hit its highest price since March 3rd. WTI crude is at a 9 month high. So oil is sitting at the highs of 2023. Prices at the pump are sure to rise.
At first glance, I’m surprised that oil and gas names haven’t already been way up. Could their returns still be coming?
Two people who I monitor on commodities made interesting statements on oil.
Warren Pies who I always listen to when he offers insight, mentioned the possibility of $100 a barrel oil in a recent CNBC interview.
Then the global commodity research team at Bank of America, led by Francisco Blanch said the following.
Blanch is reiterating his $90 a barrel Brent price target by early 2024. "The stars are finally aligning for a run in crude oil prices over the coming quarters. From a fundamental perspective, our supply and demand balance projections continue to suggest that oil markets will tighten very substantially over the coming 18 months, so we expect global oil stocks to decline substantially over this period as a result," he says.
$90 to $100 oil?
We do have oil nearing 52-week highs and US oil reserves are now at their lowest level since 1985. The decline of US reserves over the last 2 years is faster than any time in history, and it’s not even close. Reports indicated that within the past week that the US is delaying refilling reserves again due to “market conditions.”
You would think all of this should have driven energy stocks higher. Not so far.
100% of the energy sector is now trading above their 50-day moving average.
The chart of oil looks very strong. The $90-$100 looks quite realistic.
Where does this lead to possibly see a buying opportunity? Here are two that I have my eye on.
With an overall increase I think the XLE (Energy Select Sector SPDR) XLE 0.00%↑ captures widespread exposure. Its top five holdings are Exxon Mobil XOM 0.00%↑, Chevron CVX 0.00%↑, Schlumberger SLB 0.00%↑, EOG Resources EOG 0.00%↑ and ConocoPhillips COP 0.00%↑. This approach would be a similar reason to why I bought the SMH back in October 2022. It has doubled from that level in October. I discussed why I made that investment in Investing Update: What’s Priced in In?
The other way I think is to buy Chevron. I’ve talked about buying Chevron in the past but haven’t yet.
It’s still down 16% from its high. It has maintained this current trading range for a while and has yet to break out. And you really can’t talk about Chevron without talking about the long time reliable growth of its dividend. Currently now yielding 3.78%. All while this stock still trades at a very cheap 8 P/E.
The Coffee Table ☕
I came across 5 Big Lessons Popular Personal Finance Advice Gets Wrong by Sophia Bera Daigle. The depth she went into in each of these made for an informative and rather interesting read.
- wrote a very thought provoking post called Networking is overrated and probably not worth doing … for most people. He points it’s in the what-you-know and not in the who-you-know. There are some very good points that he highlights. I enjoyed this. It challenges your traditional business thinking.
The WSJ had a good piece called If All You Want Is Money, These Financial Advisers Might Say ‘No Thanks’ Financial advisors are crafting their businesses around their values and priorities. Talk about finding your niche and passion. It’s the type lesson or example that can be used in many types of businesses.
Last week I went back and tried Russell’s Reserve Single Barrel. This was one of the earlier bourbons I tried. It’s a decent option. Toffee, carmel and a hint of vanilla come out to me. Then it finishes with spice at 110 proof. It’s widely available. I think if you like toffee, caramel and a spicy burn, you may really enjoy this. I’m not the biggest fan of those, which is why it’s just ok in my opinion.
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Disclaimer: This is not investment advice. You should not treat any opinion expressed as a specific inducement to make a particular purchase, investment or follow a particular strategy, but only as an expression of an opinion. Do your own research.