Is The Recent Superior Performance Of Oil Over Equities Sustainable?

• The big picture for oil prices
• Oil versus stocks
• Commodities versus bonds-the ultimate inflation/deflation relationship
• Clean-tech starting to turn around

This morning ‘s MarketWatch had a story featuring a recent Goldman Sachs report favoring oil over equities. They also had another, right next to it, saying to the effect “not so fast on that oil”.  I thought I would take a closer look at the situation and see what the charts are suggesting. First things first, let’s take a look at oil itself.

The big picture for oil prices

Chart 1 offers a long-term perspective as the oil price ($WTIC) recently whipsawed below the red secular support trendline. Just by eyeing the chart you can see that the price is very overextended and due for a correction of some kind. However, the testing of major lows is not a character of previous major bottoms. In that respect, the blue arrows show that is normal for the oil price to experience a V-type bottom rather than a double bottom.  Of the six major lows displayed on the chart only one, that of 1986, experienced a serious test of its low prior to rallying higher.

Now the price is back above its 12-month MA and the KST is marginally positive. Note that the green vertical lines show previous sub-zero KST buy signals. Because of the nature of the V-type bottoms, none of the signals were particularly timely, merely offering confirmation. Even in the 2013 period, the only exception, the KST quickly reversed to the downside without causing anything but minor harm.  On balance, this positive price and KST action suggests that a bull market in the oil price is underway. What these indicators do not tell us is the likely magnitude and duration of that bull.

Chart 1

Chart 2 shows that heating oil prices ($HOIL) , having bounced off their secular support trendline, are in a similar technical position to the West Texas price in that they have recently moved above their 12-month MA. The KST has started to hook up but is not yet bullishly above its 9-month MA.

Chart 2

Oil versus stocks

Chart 3 compares the performance of the oil price to that of the S&P Composite ($SPX). First, we have seen a decisive break of the (dashed) bear market trendline and a positive crossover of the 200-day MA. Also, the A/B correction confirms that a series of rising peaks and troughs is now in place. Finally, the long-term KST has gone bullish as has its intermediate counterpart. However, the ratio will run into resistance shortly, in the form of the horizontal solid green trendline. It’s short term KST comes with good and bad news. The bad news is that it is somewhat overstretched. The good news is that the intermediate series is not, and that the short-term sell signals in April and May are more in line with bull market behavior rather than bear market behavior in that they failed to trigger a meaningful decline. To better appreciate bear market characteristics look at all the failed buy signals contained within the three red rectangles.  Bottom line, is that oil is likely to extend its superior performance against stocks over the balance of 2016.

Chart 3

The energy sector, not surprisingly, is also coming to life.  Chart 4 shows the Spider Energy ETF, the XLE, together with its relative action versus the S&P and a long-term KST calculated from that RS line. Both the price and the RS line have violated down trendlines and experienced a flattening in their respective KSTs. It’s true that both are also at their respective 65-week EMA’s, which could present a short-term problem.

Chart 4

That’s the idea we get from Chart 5, which compares the short-term price momentum (KST) to that for volume (PVO) for the XLE. Currently, the KST is bearish but the short-term trend is still positive because the price remains above its up trendline. However, we see the possibility, and I stress the word “possibility” that the volume oscillator, in the bottom panel, is about to complete a reverse head and shoulders pattern. If it does it only tells us one thing and that is that volume will expand. If the red trendline is violated that would mean that the expected expansion in activity would take place on the downside thereby reflecting bearish motivation on the part of the sellers. If our scenario of some kind of a primary bull market for oil materializes, any short-term break in energy stocks would probably represent a successful test of last February’s low.

Chart 5

Not surprisingly, oil stocks globally are also starting to look interesting. In this respect, Chart 6 shows the iShares Global Energy ETF, the IXC. The price and RS lines have violated down trendlines but are currently bumping up against resistance in the form of the two dashed green trendlines and the 65-week EMA’s. A digestion of recent gains may be necessary thru the period directly ahead. Once these benchmarks are surpassed though, we see clear sailing.

Chart 6

Commodities versus bonds-the ultimate inflation/deflation relationship

The relationship between commodities(PowerShares DB Commodity ETF (DBC)) and bonds (Barclays 20-year Trust  (TLT)). Appears in Chart 7.  A rising line means that commodities areoutperforming bonds and a rising line is inflationary in its implications. A falling line would be the opposite. The chart clearly shows that the bear market (deflationary) down trendline has been decisively violated and the ratio itself is very close to its 200-day MA. The long-term KST is still bearish but has certainly begun to flatten. Normally a trendline break, such as the ratio has just experienced, slows downside momentum to the point where the long-term KST goes bullish. That, I think, is the most likely outcome. In the meantime, the bearish short-term KST implies a near-term correction down to the extended green line.

Chart 7

Clean-tech starting to turn around

Chart 8 features the PowerShares Cleantech ETF, PZD, together with two momentum indicators and the RS line.  It looks like similar to the XLE chart but a quick review of its portfolio reveals no energy component in its portfolio. To me the chart looks very compelling but is not yet outright bullish. To do so, would require a break above the 2014-16 trading range and a reversal in the long-term KST in the second panel. Finally, the KST for relative action has gone bullish and this is likely to result in the RS line itself completing its 2014-16 base and more importantly violating that 2008-2016 dashed down trendline. Something worth keeping an eye on.

Chart 8

Good luck and good charting,
Martin J. Pring

The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Group or its affiliates.