Everyone hates the energy sector (Foreshadowing alert: Well, almost everyone).  And a quick perusal of Figure 1 clearly illustrates why the energy sector is unloved. 

Figure 1 – Ticker XLE versus ticker QQQ (Courtesy AIQ TradingExpert)

Since ticker XLE (Energy Select Sector SPDR ETF) topped out in 2014:

*XLE has lost -65%

*QQQ has gained +210%

And in another kick in the head to the energy sector, Exxon (ticker XOM) was just kicked out of the Dow Jones Industrial Average.  Take that, losers!

So yeah, who wouldn’t hate energy stocks and decide to shun them?  Well, as it turns out, the answer to that question of late is “the people who know the energy business the best.”

Figure 2 from www.Sentimentrader.com displays the Insider Buy/Sell ratio for executives and other muckety-mucks running energy related corporations.  The picture speaks for itself.

Figure 2 – Energy Insider Buy/Sell Ratio (Courtesy Sentimentrader.com)

As you can see, energy corporate insiders have been on a massive buying binge of late.  Interestingly, they went on a buying binge in 2019 – apparently expecting an improvement in the sector – then the sector got waylaid by Covid-19.  Instead of bailing out the insiders really kicked their share buying into overdrive as you can see at the far right of Figure 2.

Figure 3 displays ticker XLE with an indicator that I developed by simply smoothing Larry Williams VixFix indicator.  The gist of the idea, is that when this indicator reaches an extreme high level and then turns down, it often highlights a “washed out” situation which may be followed by a bullish move.  Ticker XLE is presently nearing that point. 

EDITTORS NOTE: VixFix smoothed indicator code sections can be copied and pasted into AIQ EDS or you can download the indicator code in an EDS file from here and save it to your /wintes32/EDS Strategies folder.

This indicator is based on another indicator called VixFix which was developed many years ago by Larry Williams.

hivalclose is hival([close],22).  <<<<<The high closing price in that last 22 periods

vixfix is (((hivalclose-[low])/hivalclose)*100)+50. <<<(highest closing price in last 22 periods minus current period low) divided by highest closing price in last 22 periods (then multiplied by 100 and 50 added to arrive at vixfix value)

vixfixaverage is Expavg(vixfix,3). <<< 3-period exponential average of vixfix

vixfixaverageave is Expavg(vixfixaverage,7). <<<7-period exponential average of vixfixaverage

Figure 3 – Ticker XLE with oversold indicator (Courtesy AIQ TradingExpert)

What to make of all this? 

Should savvy investors follow the insider’s lead and start piling into the energy sector?  Unfortunately, hindsight is the only way to know for sure.  But for what it is worth, my own answer is “probably, but maybe not just yet.”

Energy Seasonality

The primary reason for hesitation at this exact moment in time is seasonality.  Let’s use ticker FSESX (Fidelity Select Sector Energy Services) as a proxy for the broader energy index.  This fund’s first full month of trading was January 1986.  Figure 4 displays the cumulative total return for ticker FSESX ONLY during the months of June through November every year since 1986. 

Figure 4 – FSESX cumulative % return June through October (1986-2020)

The cumulative total return during these months for holders of FSESX during June through November is -94.7%(!!!)  So, you see my hesitation with “piling in”.

Additionally – climate change concerns aside – much of the energy industry still revolves around crude oil.  Figure 4 displays the annual seasonal trend by month for crude oil. 

Figure 5 – Crude Oil annual seasonal trend by Month (Courtesy Sentimentrader.com)

Seasonal trends can vary widely from year-to-year, and there is NO guarantee that trouble lies ahead in Sep-Oct-Nov for the energy sector.

But that is what history suggests.

Summary

The bottom line is this:

*Energy sector corporate insider buying should be seen as a bullish longer-term sign for the sector

*The energy sector is so beaten down, battered and unloved that it probably accurate to refer to the situation as “Blood in the Streets”

Based on these factors I look for energy to surprise investors in the years ahead.  That being said:

*Trying to pick the exact bottom in anything is typically a fool’s errand

*Getting bullish on the energy sector in early September is at times fraught with peril.

Sometime around December 1st it will be time to take a close look at the energy sector. If an actual uptrend develops or has already developed, the time may be write for investors to join the insiders.

Jay Kaeppel

Disclaimer: The information, opinions and ideas expressed herein are for informational and educational purposes only and are based on research conducted and presented solely by the author.  The information presented represents the views of the author only and does not constitute a complete description of any investment service.  In addition, nothing presented herein should be construed as investment advice, as an advertisement or offering of investment advisory services, or as an offer to sell or a solicitation to buy any security.  The data presented herein were obtained from various third-party sources.  While the data is believed to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets.  Past performance is no guarantee of future results.  There is risk of loss in all trading.  Back tested performance does not represent actual performance and should not be interpreted as an indication of such performance.  Also, back tested performance results have certain inherent limitations and differs from actual performance because it is achieved with the benefit of hindsight.

August 08, 2020

Hello Everyone,

As the COVID 19 Virus bounces back from a lower number a month ago, the stock markets, especially the technology stocks continue to rise. The difference this time is that although cases are rising, the number of deaths is much less proportionately than they were just 3 to 4 months ago. The reason, now the 20 to 49-year-olds are now getting the virus, but because they are generally healthier than the 70 to 80-year-olds, they are beating the virus as their immune system is stronger. The reason the technology stocks are continuing to rally is that people are staying at home and using Apple, Google, Amazon, Tesla, Netflix, Zoon, Docusign, etc.

One somewhat concerning fact is that The Top 15 Stocks in the S&P 500 account in Market Value 35% of the entire S&P 500 stock market. The Bottom 420 Stocks in the S&P 500 account in Market Value 33.8% of the entire S&P 500 stock market. This means that 15 stocks are controlling the entire S&P 500. This troubling skewed market is again showing that a very small number of stocks are making us money and the rest are on their back

1. It’s mostly technology stocks, large technology stocks. That’s it, other than some special situations. I am still positive on the stock market long term, but the large growth stocks, although still good for the longer term are now fairly valued and could have somewhat of a setback soon. The more aggressive clients are doing well as the aggressive technology stocks represent a bigger percentage of your portfolio than the bonds and dividend stocks. When the vaccine is available and people go back to work and when people feel safe to get back to some semblance of normalcy to make people want to travel, go to a local restaurant or simply to a movie, we could see these value and dividend stocks climb, but until that happens, the technology stocks will most likely dominate the stock markets.
2. Take a look below, The Dow is down 3%, The Equal weighted S&P 500 is down almost 4%, but the NASDAQ is up 22% because of 15 stocks and the values of their company controlling the entire market including the regular market-weighted S&P only up 5%.

CURRENT TRENDS:

Some of the INDEXES of the markets both equities and interest rates are below. The source is Morningstar.com up until August 8, 2020. These are passive indexes.

Dow Jones -3.0%
S&P 500 +5.0%
EQUAL WEIGHTED S&P 500 -4.0%
NASDAQ Aggressive growth +22%
Large Cap Value -5.0%
I Shares Russell 2000 ETF (IWM) Small cap -9.0%
Midcap stock funds -4.7-15.76%
International Index (MSCI – EAFE ex USA -6.2%
Financial stocks -18%
Energy stocks -36.53%
Healthcare Stocks +2.8% Moderate Mutual Fund Investment Grade Bonds (AAA) Long duration +1.5%
High Yield Merrill Lynch High Yield Index -2.8% Floating Rate Bond Funds -3.4%
Short Term Bond +1.6%
Fixed Bond Yields (10 year) .85% Yield

Classicalprinicples.com and Robert Genetskis Excerpts:

Despite concerns over a weak recovery, the S&P500 reached my estimate of fair value. In contrast, the Nasdaq has far exceeded all prior measures of reasonable valuation. How can stocks rise with the economy so weak? There are two reasons. First, the economy is not weak. It continues to recover rapidly. Second, monetary policy is more expansive than at any time in history.

Although stocks are either fully-valued or over-valued, they can still go higher. At this point, I’m comfortable continuing to ride the wave higher while holding 10% cash for use when the market corrects. Stay cautiously bullish.

Friday’s employment report shows a gain of 1.5 million private-sector workers in early July. The number of unemployed remains high at 16 million. The good news is that weekly unemployment insurance claims continued to improve through the end of July.

The ISM surveys of manufacturers and service companies also show employment contracting. However, these surveys show a strong surge in new orders, which will lead to an ncrease in jobs in August. There are reasons why unemployment remains high. Given the uncertainty over the outlook, it’s natural to await new orders before hiring. Also, employers need to trim unessential costs to pay for the increased costs associated with the virus. Finally, government payments not to work have appealed to many.

Source: Classical Principles.com

S&P 500

Source:AIQsystems.com

The S&P 500 chart is above. It is the Market weighted index described on the first page. Because technology is a major component of this index, stocks like Apple, Amazon, Microsoft and more are making is look
better than what the entire market is doing which is still down 4-10%+ if you look at all stocks.

I tried to make it simple see above. The 3390 area on the S&P 500 is major resistance and 3260, where the Up arrows are should act as support. Right below that is the 50 day moving average. Many traders or investors will sell if the S&P 500 drops and closes below the 50 moving average or the Trend line you see above. Many of you may want to sell if the S&P 500 drops below 3260. In addition the second graph shows the SD-SK Stochastics model as Overbought because the number is over 88. This is another overbought indicator.

Support levels on the S&P 500 area are 3328, 3264, 3150. 3390 is resistance.

▪ These may be safer areas to get into the equity markets on support levels slowly on the accumulation areas.

THE BOTTOM LINE:

The market has rebounded nicely over the last month mainly on the decline in Covid19 cases, and the economy reopening. The NASDAQ has done the best and should continue to do well IF the market continues higher, But now I am thinking that the small to midcap growth and value sector is more undervalued especially when the USA goes back to work and there is a safe and effective vaccine. The Midcap and Small caps could outperform if the rally continues from here. There is a major trend-line right below the markets, see above. If those are broken on a Close I will get Cautious
to Very Cautious. It is important for the trendlines and the 50 day moving to hold or it could start a correction. I like the USA market better than the international market, however the International Emerging markets is getting interesting.

If you have any questions, please call me at 860-940-7020.
Best to all of you,
Joe
Joe Bartosiewicz, CFP®
Investment Advisor Representative

Securities and advisory services offered through SagePoint Financial, Inc. (SPF), member FINRA/SIPC. SPF is separately owned and other entities and/or marketing names, products or services referenced here are
independent of SPF. 800-552-3319 20 East Thomas Road Ste 2000 Phoenix AZ 85012

Charts provided by AIQ Systems:

Technical Analysis is based on a study of historical price movements and past trend patterns. There is no assurance that these market changes or trends can or will be duplicated shortly. It logically follows that historical precedent does not guarantee future results. Conclusions expressed in the Technical Analysis section are personal opinions: and may not be construed as recommendations to buy or sell anything.

Disclaimer: The views expressed are not necessarily the view of Sage Point Financial, Inc. and should not be interpreted directly or indirectly as an offer to buy or sell any securities mentioned herein. Securities and Advisory services offered through Sage Point Financial Inc., Member FINRA/SIPC, an SEC-registered investment advisor.

Past performance cannot guarantee future results. Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Please note that individual situations can vary. Therefore, the information presented in this letter should only be relied upon when coordinated with individual professional advice. *There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio in any given market environment. No investment strategy, such as asset allocation, can guarantee a profit or protect against loss in periods of declining values.

It is our goal to help investors by identifying changing market conditions. However, investors should be aware that no investment advisor can accurately predict all of the changes that may occur in the market. The price of commodities is subject to substantial price fluctuations of short periods and may be affected by unpredictable international monetary and political policies. The market for commodities is widely unregulated, and concentrated investing may lead to Sector investing may involve a greater degree of risk than investments with broader diversification. Indexes cannot be invested indirectly, are unmanaged, and do not incur management fees, costs, and expenses.

Dow Jones Industrial Average: A weighted price average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ.
S&P 500: The S&P 500 is an unmanaged indexed comprised of 500 widely held securities considered to be representative of the stock market in general.

NASDAQ: the NASDAQ Composite Index is an unmanaged, market-weighted index of all over the counter common stocks traded on the National Association of Securities Dealers Automated Quotation System
(IWM) I Shares Russell 2000 ETF: Which tracks the Russell 2000 index: which measures the performance of the small capitalization sector of the U.S. equity market. A Moderate Mutual Fund risk mutual has approximately 50-70% of its portfolio in different equities, from growth, income stocks, international and emerging markets stocks to 30-
50% of its portfolio in different categories of bonds and cash. It seeks capital appreciation with a low to moderate level of current income.
The Merrill Lynch High Yield Master Index: A broad-based measure of the performance of non-investment grade US Bonds MSCI EAFE: the MSCI EAFE Index (Morgan Stanley Capital International Europe, Australia, and Far East Index) is a widely recognized benchmark of non-US markets. It is an unmanaged index composed of a sample of companies’ representative of the market structure of 20 European and Pacific Basin countries and includes reinvestment of all dividends. Investment grade bond index: The S&P 500 Investment-grade corporate bond index, a sub-index of the S&P 500 Bond Index, seeks to measure the performance of the US corporate
debt issued by constituents in the S&P 500 with an investment-grade rating. The S&P 500 Bond index is designed to be a corporate-bond counterpart to the S&P 500, which is widely regarded as the best single gauge of large-cap US equities. Floating Rate Bond Index is a rule-based, market-value weighted index engineered to measure the performance and characteristics of floating-rate coupon U.S. Treasuries, which have a maturity greater than 12 months.

Money Flow; The Money Flow Index (MFI) is a momentum indicator that measures the flow of money into and out of a security over a specified period. It is related to the Relative Strength Index (RSI) but incorporates volume, whereas the RSI only considers SK-SD Stochastics. When an oversold stochastic moves up through its MA, a buy signal is produced. Furthermore, Lane recommends that the stochastic line be smoothed twice with three-period simple moving averages: SK is the three-period simple moving average of K, and SD is the three-period simple moving average of SK Rising Wedge; A rising wedge is a technical indicator, suggesting a reversal pattern frequently seen in bear markets. This pattern shows up in charts when the price moves upward with pivot highs and lows converging toward a single point known as the apex

Let’s face it, the human eye is naturally drawn to the “shiny object.”  Hence the reason all the focus is on the Nasdaq Index (by the way, I think there was a glitch with my price quote software yesterday, because at one point it showed that the Nasdaq 100 Index was negative for the day.  I contacted my quote service and pointed out this obvious error and apparently they fixed it because the Nasdaq – as it is supposed to be – was again showing a gain by the end of the day – while all the other indexes were down. But I digress.)

The bottom line is that the type of large-cap/technology related/growth stocks that are presently dominating the Nasdaq 100 Index are (or at least “have”) been the place to be since the market bottomed in March.  Figure 1 displays the performance of ticker QQQ (an ETF that tracks the Nasdaq 100) relative to the performance of the Vanguard Total Stock Market ETF. 

Figure 1 – Ticker QQQ versus ticker VTI (Courtesy StockCharts.com)

The message is pretty obvious, right?  Pile into Apple, Microsoft and Amazon (which account for roughly 34% of the value of the index at the moment) and forget everything else!!! 

Oh sure, if you want to toss in a little Facebook, Google, Tesla and NVIDIA just for “diversification”, that’s OK too.  But avoid “everything else”!

And it’s a great strategy…. Well, as least as long as it lasts.

The “Stuff” Index

Anyway, I created my own index dubbed “Stuff” – it would probably be more accurate to call it the “metals and material” index, but I prefer “Stuff” (sorry, it’s just my nature).  Figure 2 displays a monthly chart; Figure 3 displays a daily chart.

Figure 2 – Jay’s “Stuff” Index; Monthly (Courtesy AIQ TradingExpert)

Figure 3 – Jay’s “Stuff” Index; Daily (Courtesy AIQ TradingExpert)

This index bottomed on 3/18, since then it has climbed +44% (for the record, like everything else it has lagged the Nasdaq 100 which is up +50% over the same time, but it has outperformed all other relevant major stock market indexes).

The index is comprised of the following ETFs:

CPER (copper)

GLD (gold)

LIT (lithium)

PALL (palladium)

PPLT (platinum)

SLV (silver)

URA (uranium)

The top performer among this group since the 3/18 low is LIT which is up +84%.

OK, so this “Stuff” index has still underperformed the Nasdaq Index, so what’s the point?

The Point

Except for gold – which has rallied to a seven year high – no one it seems has the slightest idea that there is “life beyond” large-cap/tech/growth monolith presently sucking up all the sunshine. 

Where do things go from here?  Will Nasdaq keep running?  Or is this rally overdone?  And what about “Stuff”?  Is there any guarantee that it’s strong run will continue?  I don’t claim to have the answers. 

As you can see in Figures 2 and 3, the Stuff Index is presently bumping up against resistance (while the Nasdaq has broken out to the upside and running to new highs).

So here is an interesting rhetorical question to ponder;

First look at Figure 4 which displays the monthly Nasdaq 100 on the top and my Stuff Index on the bottom.

Figure 4 – Nasdaq 100 Index vs. Stuff Index (Courtesy AIQ TradingExpert)

The question to ponder: Which has more upside potential going forward?

See also Jay Kaeppel Interview in July 2020 issue of Technical Analysis of Stocks and Commodities magazine

See also Jay’s “A Strategy You Probably Haven’t Considered” Video

See also Video – The Long-Term…Now More Important Than Ever

Jay Kaeppel

Disclaimer: The information, opinions and ideas expressed herein are for informational and educational purposes only and are based on research conducted and presented solely by the author.  The information presented represents the views of the author only and does not constitute a complete description of any investment service.  In addition, nothing presented herein should be construed as investment advice, as an advertisement or offering of investment advisory services, or as an offer to sell or a solicitation to buy any security.  The data presented herein were obtained from various third-party sources.  While the data is believed to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets.  Past performance is no guarantee of future results.  There is risk of loss in all trading.  Back tested performance does not represent actual performance and should not be interpreted as an indication of such performance.  Also, back tested performance results have certain inherent limitations and differs from actual performance because it is achieved with the benefit of hindsight.