Technicals do change and I reserve the right to change my opinion as price action evolves, but the energy sector looks like THE ONE for 2013. I remain bullish the stock market overall so I expect most sectors will perform well in 2013. Keep in mind that money rotates from sector to sector to sector and last year's leaders tend to pass the torch in subsequent years.
First, let's recap 2012 performance. Of the six "aggressive" sectors (financials, technology, consumer discretionary, industrials, energy and materials), energy was the only sector with a return below 10%. The XLE finished the year with a 3.31% gain. In the meantime, financials (XLF) and consumer discretionary (XLY) posted gains of 26.08% and 21.58%, respectively. In 2011, the defensive groups led the action higher as the XLE tacked on just 1.29% for the year. That's marked two years of relative underperformance for energy and I believe that's going to change in 2013.
In fact, it already has.
The XLE was the best performer on Friday as our major indices finished strongly to close at new multi-year highs on the Dow Jones, S&P 500 and Russell 2000. I understand that one day does not make a trend, but the XLE also led the action last week and has the highest return of all sectors year-to-date (5.70% vs. the S&P 500's gain of 4.19%). Ok, that's all history. How do the technicals look? Well, the Oil Services Index ($OSX) is my favorite within the energy space as it has just broken out of a long-term symmetrical triangle pattern. I put a lot more weight on breakouts on long-term charts. They tend to establish the "big picture" from which a trading strategy can be developed. Take a look at the $OSX weekly chart over the past 5 years:
In addition to the $OSX chart looking more bullish, I also studied the 15 component stocks that make up the oil services index and just about every one of them show improving technical strength of late. In particular, I like Tidewater, Inc. (TDW). For more information on TDW and the other oil services index components, CLICK HERE
- Tom Bowley
