I look at stocks in various ways. One way is relative strength versus the S&P 500 or the Nasdaq 100. Another way is its relative position to its average PE ratio going back several years. The last way and probably the most common way I measure an index is against itself - which is what this example is. The example here is the Energy Select Spdr ETF - one that measures the oil stocks well in my opinion. It is a very popular ETF to use to measure the average performance of an energy related stock and as the chart shows, has been going nowhere for several months now. So with the market in a bullish mood heading into the fall, lets take a quick look at the XLE using the P&F Model that I measure the broad market with.First, lets review the index. Not shown here but the Index moved up solidly from 2004 through 2007 before rolling over hard in 2008. It then proceeded to bounce in the spring of 2009 before rolling over yet again in the early part of this year. All along two of the indicators never turned up. First, the momentum 2 model was mildly positive for a few months and then started to fall down late last year. In terms of the Power and force end of things, it barely turned up and then fell flat on its face only to stabilize over the past few months. For the most part, the index as a whole has been range bound since the highs late last year with the support and resistance lines shown on the chart. Supporting this range bound argument is the rather flat 65 week moving average which is basically in the middle of the trading range.
So is there reasons to be bullish or bearish for that matter? Well first, in terms of the index (versus looking at the price of oil or natural gas), a few things are developing for the better here. The Momentum1 model is sitting right at resistance. A push up in this sector and it will breakout. The index itself has climbed over the 65 week already arguing for a move to the top of the range. And the P&F model is marginally crawling back to resistance. However, the fact that the momentum2 model has fallen back below resistance is a problem. It has not made a lower low but the fact that the sellers stopped things right in their tracks argues for caution. As for the oil side of the ledger, not shown here, the "trender" argues for crude to move higher though you would not know of it by the latest action. The weak natural gas market does not help things though which means the index might remain range bound till something is resolved with either rising or falling energy prices on aggregate.
With that said, I am somewhat bullish at this point on the XLE. The valuation argument does not normally hold water because housing stocks traded at 5x trailing earnings in 2006 and look what happened to them. this sector was the "play" of the hedge fund world through the past decade and with technology now the momentum story, the index might have a hard time getting going. That is not to say though that it cannot trade to the top of the range which is my expectation. Thus color me short term bullish and long term neutral.
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