Beleaguered oil stocks are testing important support stretching back 3 decades.
It’s no secret that while the broad equity market has fared pretty well so far in 2017, oil stocks have taken it on the chin. If we compare sector performance via the SPDR ETFs, not only is the Energy SPDR (ticker, XLE) the worst performer, but it is the only one in the red for the year. And not only is it down, but it is down some 9.5%. Then again, XLE did lead the way among the sectors in 2016, gaining almost 25%, so some giveback is not abnormal, nor is it necesarrily unhealthy in the long run. That is unless the giveback results in the sector threatening to break a key line of support stemming from 3 decades ago.
In this case, we are referring to the XOI, the NYSE ARCA Oil & Gas Index. With its inception back in 1984, the XOI is one of the oldest indices tracking oil stocks. And throughout most of its 30+ year lifespan, it has been supported by a rising trendline stemming from its low in July 1986. This trendline (drawn on a log scale) connects the lows in 2003 as well as those in August-September 2015.
As stock market losses accelerated to begin 2016, the XOI finally broke down below the post-1986 trendline. Just 2 months later, however, at the beginning of March, the XOI would rally back to reclaim the trendline once again. Over the remainder of the year, the XOI would go on to test the trendline at least a handful of times – each time successfully. Several of these developments prompted Charts Of The Day and blog posts from us, focusing on what we termed oil stocks’ “Line In The Sand”.
As stated, each of the XOI’s tests of its post-1986 Up trendline over the final 10 months of 2016 proved successful, i.e., the XOI held above the trendline. Following the U.S. election last November, the XOI was finally able to increase its rally trajectory and put some meaningful space between it and the trendline. It would not last, however.
After a steady 3 and a half months of declines to begin the year, the XOI once again finds itself testing its lifetime Up trendline, currently near the 1140 level.
Here’s a view from closer up (notice how the index has “respected” the trendline over the past 18 months):
So what now? Will oil stocks hold the trendline again and resume their leadership that they displayed throughout 2016? Or is the repeated testing of the trendline wearing it down, leaving it destined to fail sooner than later? That is to be determined. But there are some additional measures of support that may serve to bolster the XOI’s chances of holding this long-term “line in the sand” support…at least for now.
What are these additional support measures – and how will we know if they are successful? Furthermore, how can investors take advantage of the situation? Check out the Premium post at our new “all-access” site, The Lyons Share, for the more specific details related to this important development in oil stocks. If you find our charts and research that we share here helpful and enjoyable, check out The Lyons Share – we are confident that you’ll find a lot of value in the service.
Disclaimer: JLFMI’s actual investment decisions are based on our proprietary models. The conclusions based on the study in this letter may or may not be consistent with JLFMI’s actual investment posture at any given time. Additionally, the commentary provided here is for informational purposes only and should not be taken as a recommendation to invest in any specific securities or according to any specific methodologies. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.