OPEC DECISION -- AND COLD WEATHER -- MAY BOOST ENERGY SECTOR -- NATURAL GAS STOCKS ARE THE STRONGEST

OPEC LEAVES QUOTAS ALONE... OPEC has decided to leave their oil quotas alone. Energy prices are trading higher today. Recent OPEC statements suggest that higher oil prices are in store. With oil prices at the top of the OPEC trading band, some increase in production would normally be expected to keep the price from rising further. OPEC ministers have stated, however, that lower oil revenues resulting from a weaker dollar justify a higher oil price. Combined with the onset of cold weather in the northeast, that's a possible recipe for higher energy prices -- and a stronger energy sector. Natural gas prices have recently jumped to the highest level in two months and are leading the group higher today. That may explain why natural gas stocks are the strongest part of the energy complex. In Thursday morning trading, the Energy Select Sector SPDR is the strongest stock market sector. Chart shows that the XLE is challenging the highs formed during October and November. An upside breakout would be a strong sign for a group that's been underperforming the market all year. Chart 2 gives a year-long view of the energy sector. It's been trading sideways for months while the rest of the stock market has been rising. That underperformance can be seen in the falling relative strength line since March. An upside breakout by the XLE could start pushing the RS line upward as well.

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NATURAL GAS IS STRONGEST ENERGY GROUP... Within the energy sector, natural gas stocks have been doing much better than oil service stocks. Chart 3 shows the AMEX Natural Gas Index rising to a new six-month high. This group is tied to natural gas, which currently is rising faster than oil prices. Chart 4 shows the PHLX Oil Service Index just starting to bounce off its recent lows (and moving over its 50-day average). The OSX is more closely tied to oil prices. The bottom line is that natural gas stocks may lead the budding recovery in the energy sector. Sectorwise, some money may start rotating back into the energy sector which has been one of the worst performing sectors this year. An upside breakout by the XLE could go a long way in attracting new funds to the energy sector.

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