WTIC CRUDE OIL CLOSES AT TWO-YEAR HIGH -- ENERGY SHARES WERE THIS WEEK'S STRONGEST SECTOR -- ENERGY SHARES ARE LAGGING TOO FAR BEHIND THE RISING COMMODITY -- THE WTIC/XLE RATIO ALSO BREAKS OUT TO TWO-YEAR HIGH
WTIC COMPLETES BULLISH BREAKOUT... The weekly bars in Chart 1 show WTIC Light Crude Oil ending the week above its early 2017 peak near $55 for the first time in more than two years. That upside breakout puts WTIC in sync with Brent Crude Oil which rose over $60 for the first time in two years the previous week. That puts both versions of the oil market in chart uptrends. Brent's $6 premium over WTIC is also helping to pull the latter higher. That carries good news for energy shares which have been the market's weakest sector this year. But that may be changing. Energy was the past week's strongest sector.
(click to view a live version of this chart)
Chart 1
ENERGY STOCKS ARE LAGGING BEHIND THE COMMODITY ... Not only have energy stocks been this year's weakest sector, they're the only sector still in the red for the year (-6.4%). Since the second half of August, however, the Energy SPDR (XLE) has gained twice as much as the S&P 500 (by a 12% to 6% margin). Over that same time span, WTIC has risen 21%. Which brings us to our next chart. The box in Chart 2 shows the weekly price bars for WTIC Crude Oil (the U.S. benchmark) bottoming in late June and rising throughout the third quarter, before achieving this past week's bullish breakout. The solid line is a relative strength ratio of the Energy SPDR (XLE) divided by the S&P 500. The circle shows the sector performance improving since the end of August, suggesting that rising crude oil is having a positive effect on energy stocks. The bigger message from Chart 2, however, may be the fact that energy stocks have performed so poorly this year in the face of the relatively stronger commodity. Over the years, a close correlation has usually existed between the price of oil and the performance of energy shares. Chart 2 suggests that energy shares have a lot of catching up to do reflect the stronger picture for crude oil and energy prices in general.
(click to view a live version of this chart)
Chart 2
RATIO OF CRUDE OIL TO XLE IS ALSO BREAKING OUT... There's another intermarket factor which appears to favor higher energy shares. And that's the premium (or spread) between the price of the commodity and its related stock sector. The weekly bars in Chart 3 plot a relative strength ratio of WTIC Crude Oil divided by the Energy Sector SPDR (XLE). Historically, the two usually trend in the same direction. Over the last 10 and 20-year periods, the 12-month correlation coefficient between WTIC and XLE has been .80. [That means they trend in the same direction 80% of the time]. Which makes today's final chart even more interesting. The chart shows the commodity rising faster than the XLE since the start of 2016 (when oil bottomed). To the far right, the WTIC/XLE ratio has just touched the highest level in two years (mainly because of the upside breakout in WTIC). Assuming their historic relationship remains intact, the upside breakout in the ratio should start to exert a more upward pull on energy shares. Not only are they lagging too far behind the rest of the market. They're also lagging too far behind the price of crude oil.
