US Energy Sector to benefit from Cross Asset Rotation (26 Oct ’17)
Our Monthly Publication “S&P500 relative to Commodities”, has been published.
Amongst several changes, we have Downgraded the US S&P500 Index to Underweight, relative to Energy. Or, we expect Energy to Outperform US Equities.
Our Monthly Publication “Commodities relative to DBC” was published on 6th September. Within this publication, Energy relative to the broad Commodities Index (DBC) was Neutral, pending an Upgrade to Overweight.
However, recent developments have seen Energy break higher, and we anticipate an Upgrade to Overweight when we update this report at the beginning of November.
Taken together, we maintain a positive stance towards Energy, and expect investors to further increase exposure in the Energy sector in the coming months.
Stocks of Potential Interest
For USD based investors, we have also highlighted several stocks which we believe will benefit from this improvement in the Energy Sector. It is worth highlighting, however, that as the S&P500 approaches a multi-year Fibonacci projection, and studies become overstretched, broad equity gains could become progressively more difficult to maintain. This could lead to an increase in volatility as investors adopt a selective approach to their equity portfolios.
Prices are balanced in a broad range, capped by the $53.17 year high of December 2016. Improving momentum readings and the strengthening Tension Indicator highlight potential for a break higher in the coming months. A close above $53.17 will confirm continuation of the 2016 rally, and turn investor sentiment outright positive. Subsequent focus will turn to the $57.24 high of November 2015, with potential for extension to the $59.00~, (50%) Fibonacci retracement of the 2014-2016 fall. A close below the $48.70 low of 6 October, however, will delay higher levels, as the multi-month consolidation phase extends further.
Exxon Mobil (XOM)
We have been positive Exxon Mobil for several weeks, and maintain a constructive stance into the coming months as both momentum studies and the Tension Indicator continue to improve. Prices have extended the bounce from the August/September lows and are currently pressuring the $83.50, (38.2%) Fibonacci retracement of the 2016-2017 fall. A close above here will signal continuation of the August rally, and further improve investor sentiment as focus subsequently turns to the $84.25 high of March. Beyond here is the $85.80, (50%) Fibonacci retracement. A close below the $81.35 low of 6 October, however, will delay higher levels, as investors adopt a Neutral stance.
Occidental Petroleum (OXY)
Recent consolidation is giving way to a break higher, with prices currently pressuring the 233-month weighted MA. Rising momentum studies and the improving Tension Indicator highlight further gains in the coming months. Resistance is at the $67.60, (23.6%) Fibonacci retracement of the 2014-2017 fall, but a break is looked for as investor sentiment gradually improves. A break above $70.00 will then open up the $74.00, (38.2%) retracement. An unexpected close below the $63.00 high of July will delay gains and at best, lead to extension of the basing pattern from May 2017.
In the coming months, we anticipate further improvement in the Energy sector. This will likely be driven by asset rotation within the Commodities sector. Cross asset rotation from Equity investors could also keep prices buoyant, as asset managers rebalance their equity exposure and adopt a positive weighting to Energy driven instruments.