The market rally higher has taken quite a few stock groups along for the ride - most notably the Consumer Discretionary and Industrial sectors. However, we've begun to see some very small rotations out of this group, and into the Energy group. This interests us greatly, for Crude Oil prices are now hard upon the $85/barrel level and showing signs of moving still higher. This will benefit the Energy group disproportionately given the broader Energy sector has under-performed the S&P 500 by roughly -4.0% this year. This is on top of further under-performance last year of over -4.0%. Thus, we believe the time has come to own Energy shares. But which sub-set of Energy do we want to own?
If we look at the Integrated Oil/Oil Service groups ratio, then we find the Integrated Oils have underperformed rather markedly as they normally due out bear market bottoms. However, we're starting to see signs in the ratio that it is turning higher towards its 60-week moving average. A breakout above this level would obviously be positive and would suggest roughly a +20% integrated oil out-performance in the weeks and months ahead. Too, we find the 20-week stochastic fat oversold levels and more importantly - forging a positive divergence with ratio prices. This would seem to be the perfect setup.
Thus, while many Oil Service stocks have bullish patterns, we think it more prescient to consider shares in Devon Energy (DVN) and Conoco-Phillips (COP) at current levels.
Good luck and good trading,
Richard
