Several groups in the energy sector have shown surprising strength recently despite crude oil's general downward trajectory over the past year. Good performance in the face of negative background conditions is a technical plus, and that means investors should keep an eye on the group.
Last week, I wrote here that energy stocks were among the new pacesetters as stock market leadership made some healthy changes. Since then a number of component stocks in the PHLX Oil Services index (OSX) have made technical breakouts.
For example, oil driller Helmerich & Payne (ticker: HP) jumped sharply higher following an upside trend break.
The actual breakout occurred May 3, but the stock did not move much over the following nine days. But on May 17, the stock rallied again on heavy volume to confirm the change of trend for the better. With good momentum and volume indicators in place, it would not be a surprise to see the stock challenge its February high, near $70, over the next few weeks (it traded at $65.60 Monday afternoon).
Peers such as Diamond Offshore (DO) and Baker Hughes (BHI) also have solid upside breakouts in place and have pushed the Market Vectors Oil Services ETF (OIH) to levels not seen since August 2011 (see chart below). The April-May run-up paused at strong chart resistance and in Mondays' trading that level was pierced. It was both a short-term breakout and a fledgling long-term breakout as this resistance level goes back to 2009.
What is surprising is this performance in light of the weak data now available on the fundamental side. Total oil supplies remain near their highest weekly level in at least 30 years, according to Energy Information Administration. Normally, such heavy supply keeps a lid on oil prices, which often translates into underperformance, if not declines, in oil services stocks. But these stocks are bucking that trend.
Investors have the opportunity to buy stocks that are now on the move but not at their all-time highs, at a time when much of the domestic stock market is in uncharted territory. The stocks mentioned above are breaking out from patterns that formed in the middle of their respective 52-week ranges.
Some investors prefer stocks in strong groups that are just starting to play catch-up. One old Wall Street truism is that group action is a large part of individual stock performance, as is the overall market trend, so there is something to be said for this strategy.
National Oilwell Varco (NOV) is one of the weakest component stocks in the oil services index and ETF but it, too, now sports a fledgling upside breakout (see chart below).
Although it is still trading below its 200-day moving average, it has been able to make a convincing move above its equally important 50-day average. Momentum indicators are rising and volume has picked up, albeit modestly, over the past few days. If it can hold above resistance near $71 (it traded at $69.80 Monday afternoon) then the prospects for a solid run higher to chase its sector should be good.
There is one more industry within the energy sector of note and it, too, is defying the fundamentals. Oil refiners are on the move higher even though crude oil has not done the same. For example, Tesoro (TSO) is up more than 10% over the past two trading sessions to come within a few nickels of its all-time high set in 2007, before the energy market collapse.
Peers Valero Energy (VLO) and Marathon Petroleum (MPC) are not at such lofty levels, but both scored upside breakouts through respective falling trendlines last week.
With several subsectors in the energy group on the move higher, it is not a surprise that the United States Oil Fund (USO), an exchange-traded fund, is poking its head through the falling trendline that has contained it since last year (see chart below).
Whether this breakout in the commodity will stick remains to be seen. Will the fundamentals adjust to the technicals or will the reverse occur? Although I am biased as a technical analyst, I believe the technicals usually lead, and that suggests higher prices all around.
*** UPDATE: 5 years later ***
