ETF Update: The Energy Advance

There has been an interesting and dramatic shift in sector leadership.  The financial ETF’s, while still in our ‘buy’ range, moved lower in the rankings as markets awaited the results of the government “stress tests.”  Meanwhile, the interest in nuclear energy that we noted last week has broadened to include a variety of energy ETF’s.

The model also shows continuing strong ratings for most sectors, encouraging a bullish stance on the market.

Background

Each week we report results from TCA model, which follows both Trends and Cycles while adding a touch of Anticipation.  We currently use a universe of 57 ETF’s include three index inverse funds.  The ratings give an interesting perspective on the overall market as well as specific sectors.  We hope that readers find this an interesting supplement to their own analysis.  We are always interested in suggestions for ETF additions, and expect to amend our universe in the near future.  (The complete current rankings are at the end of the article, along with an explanation of our methodology).
Oil and Gas Exploration (IEO)

Our featured ETF this week is the iShares Dow Jones U.S. Oil & Gas Exploration & Production Index Fund (IEO).  The fund is strictly focused on energy and production stocks.  The top five holdings make up 37% and the top ten 56%, so it is not overly concentrated.  The beta is about 1.  The P/E ratio is about 11, reflecting continuing skepticism about oil and the economy.

The sector has made a big move from the March bottom.  Technical analysts might have trouble finding specific resistance in the chart.  IEO made the biggest weekly move in our model rankings, going from 30th to 7th in our rankings.  Here is the chart.

Fundamental Analysis and Comment
Much to our surprise, there was little attention paid to the strength in IEO.  Perhaps we will see some commentary during the next week.  Those looking at energy in general were pretty skeptical.  This analysis from Marc Courtenay is typical:

For most of us and myself included, a sustained rise in energy prices seems hard to justify. Short of some sudden and unanticipated disruption in supply, I would expect energy prices to top out in the next two weeks and then start heading down to the lower end of the range.

“There’s shock and disbelief that oil and gas can defy the normal historical reactions to supply and demand,” analyst Phil Flynn said in a client note. “Traders are calling me and are stunned with no idea of what is happening.”

Energy Fundamentals

Despite the lack of ETF commentary, there are some bullish signs for energy sectors.

Pumps highlights three factors:

1. Summer driving season has helped take fuel prices to new highs.
2. A pick up in China’s manufacturing which “…is generally a good indicator of increasing energy demand.”
3. Growing support for the idea that world oil production has peaked, most recently from Raymond James.

The energy stocks that we follow have P/E multiples suggesting little expectation of economic improvement, OPEC cuts, or weather effects.  This may be the rationale behind the evidence picked up by our model.

Weekly TCA-ETF Rankings

51 of our 57 sectors are in the “buy” range.  Several sectors have extremely strong ratings.  The overall picture is even stronger than it has been in recent weeks.  The overall strength ratings have helped to keep us fully invested through the extended rally.

The daily portfolio gained 5.6% on the week, slightly trailing the S&P 500 (^GSPC).  Based upon the model signals, we continue our official bullish position in the Ticker Sense Blogger Sentiment poll.

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