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A Look At The Energy Sector Relative Strength at Trader’s Narrative

I’ve already touched on the energy sector briefly when I presented the contrarian case for BP. Looking broadly at the sector, it is important to note however that it has been a horrible performer in the past few years - especially when we compare it to a powerhouse like the semiconductors.

At the most gloomy point in the bear market, even though the energy sector had been pushed to an extremely oversold level, it failed to attract serious and sustained buying. And while the majority of the stock market rocketed higher from the March lows, energy stocks for the most part sat out the rally.

That relative weakness continued this year when the recent decline took prices well below the February lows. Of course, the Horizon deep water well blowout and the ensuing disaster were major factors as well. But even before this externality, things were not going well for oil companies:

Energy sector select ETF XLE Jun 2010

But in the very short term, we’ve seen outperformance in this sector. Since the start of this month, the sector as a whole has gained more than the S&P 500 index. Here is a chart showing the performance of the top 10 components (by weight) of the Energy Select Sector SPDR ETF (XLE) for that time frame:

Energy SPDR XLE top 10 components Jun 2010

Of these, Halliburton (HAL) and Schlumberger (SLB) are the two with the highest returns this month so far. But note that the XLE ETF does not include British Petroleum (BP). Considering how extremely disliked this group is, I don’t think it is unrealistic to see them continue to bounce back in the short term.

The continuing weakness in the long run though, may be a sign of something seriously wrong with this sector. Here is a short video of Jim Chanos explaining how large integrated oil companies are “liquidating themselves”:

On a lighter note, here’s the Daily Show’s Jon Stewart on the unending American quest to end dependence on foreign sources of oil:

Link for Canadian readers.

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