ENERGY LEADERS FAVOR LARGE CAPS -- BIG LEADERS INCLUDE CVX, COP, AND HAL -- COAL ETF HAS BEEN STRONGEST PART OF ENERGY PATCH -- COAL LEADERS ARE PEABODY, JOY GLOBAL, AND BUCYRUS -- TODAY'S TRANSPORTATION BREAKOUT LOOKS MORE CONVINCING
BIGGER IS BETTER IN THE OIL PATCH... This morning's message showed the upside breakout in the Energy SPDR (XLE) which is one of the day's strongest groups. [Arthur Hill described the initial bullish breakout in the XLE last week and correctly forecast higher energy prices]. I promised to show some of the stocks leading the energy rally. As has been the case for the market in general, large cap stocks are leading the rally. [A falling dollar usually favors large caps that derive much of their sales from foreign business and exports]. A quick review of the largest stocks in the XLE turned up the first three charts. The strongest is Chevron which is breaking out to a new 52-week high as shown in Chart 1. CVX is the second biggest stock in the XLE (14%). Charts 2 and 3 show two other big energy leaders among the top ten holdings in the XLE. Chart 2 shows ConocoPhillips clearing its August high, while Chart 3 shows Halliburton nearing a test of its spring high. All three have rising relative strength ratios (below charts). Two other leaders aren't in the top ten holdings but are among today's biggest percentage gainers. Chart 4 shows National Oilwell reaching a six-month high, while Chart 5 shows Sunoco nearing a new 52-week high. If you're not a stock-picker, the easiest way to buy into the energy sector is with the Energy SPDR (XLE). Chart 6 shows the XLE hitting a new six-month high today after completing a "head and shoulders" bottom last week. Upside volume has been impressive throughout the rally.
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Chart 1
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Chart 2
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Chart 3
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Chart 4
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Chart 5
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Chart 6
DON'T FORGET COAL... Oil stocks haven't been the strongest part of the energy patch. Those tied to coal have. One example is Peabody Energy which is a producer of coal. Chart 7 shows that energy leader nearing a test of its 2010 highs. Its rising relative strength line shows the coal stock to be a leader in the XLE since May. Chart 8 shows the Market Vectors Coal ETF (KOL) racing to a new six-month high over the last month. The rising KOL:XLE ratio (below Chart 8) shows the KOL to be the energy leader over the last four months. A big reason why the KOL is doing so well is that it has a heavy weighting of foreign coal companies, especially in China. It also includes some stocks that don't produce coal, but the machinery needed to mine it (along with other commodities). And they've been very strong. The two green lines above Chart 8 show Joy Global (JOYG) trading at a new 52-week high, while the lower line shows Bucyrus Intl. (BUCY) very close to doing the same. In my view, energy represents one of the best values in the market right now. That's largely due to rising oil prices (which is one of the best commodity values). But don't forget about coal and stocks tied to it.
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Chart 7
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Chart 8
TRANSPORTATION BREAKOUT LOOKS MORE CONVINCING... My closing Market Message last Tuesday showed the Dow Transports hitting the highest "closing" price in four months, which appeared to have completed a Dow Theory buy signal (when the Industrials and Transports turn up together). Admittedly, the upside follow-through was disappointing which put that upside closing breakout in doubt. Today's nearly 3% rally, however, appears to be resolving that doubt on the upside. Chart 9 shows the TRAN trading well above its summer "intra-day" highs. This Tuesday's upside breakout looks more convincing, as does the Dow Theory buy signal..
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Chart 9
S&P 500 RESUMES UPTREND... A week-long consolidation has given way to higher stock prices today, with the S&P 500 reaching the highest level since early May (Chart 10). That resumes the uptrend that started in September, and confirms the "head and shoulders" bottom pattern that formed over the summer. Stocks have a lot going for them right now which includes a falling dollar (rising Euro), rising commodity prices (and stocks tied to them), and rising foreign shares -- not to mention strong chart patterns. Material (including gold) and energy stocks are among today's strongest winners (with the GDX hitting a new record high). The ability of stocks to rally during the normally weak September/October time period is also impressive. That increases the odds that the the four-year presidential cycle (when the market bottoms every four years) started a bit earlier this year, which should lead to a seasonally-stronger fourth quarter. Market breadth is decidedly positive. All we need now is more upside volume.
