Why energy is likely headed higher

Last week I wrote about some reasons why the price of oil may still be headed even higher, in spite of how many very smart people find that possibility to be preposterous. This week I have more evidence that the whole energy complex could continue its recent march higher … and that you should rarely listen to the experts.

Before I get too deep into the weeds, however, I’d like to take a minute to extend a special welcome to all the new folks that have joined us this week, to thank you for your business and to thank you for your patience as we work hard to get everyone up to speed.

As part of the TradeStops services, I currently publish two editorials a week – on Tuesdays and Fridays. On Tuesdays I write about principles of good investing and investor psychology. On Fridays I share some of my personal market views, which often extend well beyond the bounds of TradeStops.

Back to the energy complex …

The psychology of the markets never fails to amaze me.

As the price of energy and energy stocks was collapsing the past two years, there was constant talk about how energy had bottomed and couldn’t go any lower. And then it did – again and again.

Now that we’ve seen a rally in energy and energy stocks in 2016, the chatter has shifted to how energy prices can’t go any higher from here! It’s enough to drive an investor mad (and make sure that the media and advertisers get plenty of attention).

That’s why I love to tune out the noise and tune into the data.

As I mentioned last week, the price of oil is on the rise, but hasn’t yet triggered a new entry signal from our Stock State Indicator (SSI) system. Here’s an update to the chart that on OIL, the ETF that tracks the price of West Texas Intermediate Crude.

You can see that our SSI Trend indicator kept us out of oil since late 2014 but that, as the decline in the price of oil has slowed and even started to recover, the trend is starting to flatten out. I continue to be optimistic that the price of oil is recovering … but there is definitely still work to do.

Whenever you’re looking into the energy sector, there is one big player that you can’t ignore – Exxon Mobil (XOM). In fact, XOM represents nearly 20% of the assets of XLE, the popular energy sector ETF. The table below shows the top 10 holdings of XLE and what percent of the total assets of XLE each component stock represents.

What’s going on with XOM today? It’s heading decidedly higher, having recently triggered an SS Entry signal about a month ago.

Exxon Mobil is widely considered to be one of the greatest companies in the world, and certainly the best of the oil majors. And indeed, the energy sector as a whole seems to often take its cue from what’s going on with Exxon Mobil. The below chart shows how each time that XOM and XLE have started to move in different directions, XOM has proven to be the leader.

In 2007 and 2008, XLE headed higher while XOM stayed flat and went down. XLE soon followed XOM’s lead. In late 2011, XOM started heading higher, while XLE headed lower. Most recently, in late 2015, XOM lead the way higher once again.

XLE even recently triggered its own SSI Entry signal, about a month after XOM did the same.

All of which is to say is that things are looking up in the oil patch, even if a lot of very smart people think otherwise (and the media echo chamber happily amplifies them).

These days I do my best to stay out of the way of unstoppable forces … and I let my data lead the way,

Richard