Trading Places with Tom Bowley

Energy Is Now Primed For A Big Rebound

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I know. I know. It's been the worst sector and the second worst sector isn't even close. Look at this sector leaderboard for the past six months:

The XLE is the ONLY sector in negative territory. Its SCTR score is 2.3. What the heck could trigger a rally?

The U.S. Dollar ($USD).

It began rolling over late last week and I believe it could continue for awhile. The PCE index from the Q4 GDP report on Friday showed inflation WAY below the Fed's 2% target level and that'll either keep the Fed on hold on rates for a long time.....or it might trigger pressure on them to lower rates again. That will put downward pressure on the dollar. There's already pressure on the dollar to move lower, however:

U.S. treasury yields are dropping much faster than treasury yields abroad (most notably in Germany, shown above). The direction of that relationship generally triggers a similar reaction in the USD. That's what the bottom panel above (correlation) tells us. We spend a lot more time in positive correlation territory than we do in negative (or inverse) correlation territory. I see the dollar falling and both energy (XLE) and materials (XLB) strengthening on a relative basis. I don't expect this to be a long-term change in direction, but 1-3 months wouldn't shock me.

There's another chart you should be aware of:

50-52 is an important support zone. Given a potential target near 72, the reward to risk entry into the XLE here makes a lot of technical sense.

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Happy trading!

Tom

Tom Bowley
About the author: is the Chief Market Strategist at EarningsBeats.com, where he provides stock market education, guidance, and trading strategies using a unique combination of technical, fundamental, and historical analysis. Tom provides EarningsBeats.com members with four portfolios (Model, Aggressive, Income, and Value), all designed to beat the benchmark S&P 500, and a revolving Watch List of hundreds of companies reporting strong quarterly earnings (must beat both revenue and EPS estimates) and exhibiting technical strength as well. These companies comprise EarningsBeats' annotated Strong Earnings ChartList (SECL), from which Tom trades exclusively. Tom writes a Daily Market Report (DMR) for members to include an executive summary, market outlook, sector/industry watch, and trading ideas. Learn More
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