Tech Flying, Energy Dying; What Will it Take to Change the Narrative?

Mike Larson

What’s one of the biggest market stories so far this year? Tech stocks are flying, while energy stocks are dying!

Take a look at this ratio chart. It shows the spread, or difference, in performance between the Technology Select Sector SPDR Fund (XLK, Rated “A”) and the Energy Select Sector SPDR Fund (XLE, Rated “D+”).

The panel in the bottom left is what you should be zeroing in on. The higher the line, the greater the outperformance of energy stocks relative to tech stocks. The lower the line, the greater the outperformance of tech relative to energy.

You can see that this ratio just sank to 10.2. That’s a mere fraction of the 64 level we hit when oil prices skyrocketed to almost $150 a barrel back in 2008.

Is it as bad as the dot-com mania of the late-1990s? No, not yet. We sank to negative-35 back then. But it’s far below average, and the lowest since 2004.

Want to look at the figures in another way? Then consider this: The XLK is UP more than 17% year-to-date. On the flip side, the XLE is DOWN 12%. That’s a truly shocking divergence, especially when you consider that crude oil prices have basically been moving sideways since last May. For its part, natural gas is roughly unchanged so far in 2017.

There’s something else odd here. In the first phase of the energy sector meltdown from 2014 to 2016, high-yield bond prices plunged right alongside energy shares. That’s because falling oil prices didn’t just impact corporate earnings. They also raised the specter of widespread debt defaults and massive sector bankruptcies.

The SPDR Barclays High Yield Bond ETF (JNK, Rated “C+”) plunged more than 25% from peak to trough. Since bond prices and bond yields move in opposite directions, the average yield on a BofA Merrill Lynch index of junk bonds soared to more than 10% from 5.2%.

But that just isn’t happening now. The JNK is actually UP more than 4% year-to-date in price, while junk bond yields have sunk all the way back to around 5.5%.

Bottom line: I can’t say for sure when this dramatic divergence will end. Nor can I say what might change the energy sector’s fortunes. OPEC just tried to support oil prices by extending production cuts into 2018. But the move had little positive impact.

What I DO know is that this ratio is getting aawwwfffulllyyyy stretched. It also seems like everyone and his sister is already on board the tech stock train. And to top it all off, the credit markets sure don’t seem to be as worried about the prospects for energy as the equity markets are.

So you may want to start leaning against the crowd. Or in practical terms, start cashing in a few of those thousand-dollar Amazon.com (AMZN) shares, and grab a handful of energy stocks from the bargain bin instead!

To help you get started, here is a Stock Screener I built using the tools available to members of our Weiss Platinum service. It shows all BUY or HOLD rated energy stocks in our universe with at least 50,000 shares in average trading volume.

This time I limited the search to smaller stocks with a market cap of between $50 million and $2 billion, and excluded any based outside of the U.S. You can see that as of earlier this week, Noble Midstream Partners LP (NBLX, Rated “B”) was at the top of the list, followed by a mix of other Master Limited Partnerships (MLPs) and smaller producers.

Data Date: May 31, 2017

Finally, you may notice that many of these energy companies pay fairly generous dividend yields. If you’re looking to use names like these to boost the income your portfolio throws off, stay tuned. I’m going to have much more on that front before long!

Until next time,

Mike

 

 

Mike Larson, Senior Analyst

ETF Spotlight Edition, by Mike Larson, Senior Analyst

Mike Larson is a Senior Analyst for Weiss Ratings. A graduate of Boston University, Mike Larson formerly worked at Bankrate.com and Bloomberg News, and is regularly featured on CNBC, CNN, Fox Business News and Bloomberg Television as well as many national radio programs. Due to the astonishing accuracy of his forecasts and warnings, Mike Larson is often quoted by the Washington Post, Chicago Tribune, As-sociated Press, Reuters, CNNMoney and many others.

About the Income & Dividend Analyst

In an era of high-risk exuberance, Mike Larson stands out as a leader in conservative investment strategies that outperform the market overall. Using the safety-oriented Weiss Ratings as a guide, he has a proven history of guiding investors to stocks and ETFs that provide asset protection, consistent dividends and excellent growth.

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