Greg Guenthner

In bull markets, it’s good to see investors rotate in and out of different stocks.

Some sectors establish themselves as market leaders for a while. As a rally progresses, you’ll begin to see profit taking on some of these names, prompting traders to look elsewhere for strong momentum moves.

Of course, it’s a sign of a healthy rally when you see this “market of stocks” environment. It’s great for traders, too — mainly because there’s always a stock out there that’s in play or ready to make a big move.

Today, I’m going to show you one of these sectors that is beginning to break out. It’s a great place to look for new setups. In fact, you might even come across your next trade from this group of stocks.

I’m talking about the energy sector.

Late last week, I wrote to my Rude Awakening readers about how energy stocks and gold have diverged — with gold moving lower as energy names begin to break out to the upside.

Before the divergence, gold and the energy sector had underperformed the S&P for more than 18 months. Both sectors were essentially flat over the past year and a half…

But the energy sector is starting to make a move. The Energy Select Sector SPDR (NYSE:XLE) has exploded over the past three trading weeks, rising more than 7%. XLE posted 52-week highs Friday — and then again this morning as well. Take a look:

You can clearly see the breakout above the 2012 highs. Also, it’s important to note that unlike many other strong sectors, XLE has not yet taken out its 2011 highs.

The Consumer Discretionary SPDR (NYSE:XLY) and Health Care SPDR (NYSE:XLV) have each posted four-year highs within the past two trading sessions. Yet over the past four weeks, XLF has outperformed them both. This relative strength shows that energy shares — which have lagged the market for some time — are looking to play catch-up:

I suspect we’ll see XLE make a serious run at its 2011 highs in short order…

Also, it doesn’t hurt that earnings season (so far) has been especially kind to energy stocks. Across the board, we’re seeing stronger-than-expected earnings, with nearly 64% of companies that have already reported beating estimates. That’s the highest rate since the fourth quarter of 2012, according to Bespoke Investment Group.

The upside surprises are even more impressive. Energy names are leading the charge, with a collective positive revenue surprise of +3.28%, according to Virtus Investment Partners. Now, I’m not saying you should be trading earnings reports. But it doesn’t hurt to have this tail wind when looking at energy names.

Also, if energy names start popping, you might want to keep a close eye on the oil services sector. There hasn’t been a breakout in the Market Vectors Oil Services ETF (NYSE: OIH) just yet, but this is, obviously, a closely linked sector that has also been very strong relative to the market at large:

 

While it’s still pretty far from its 2011 highs, OIH could continue its strong run if it breaks above horizontal resistance at $44. It’s definitely worth watching.

Best,

Greg Guenthner, CMT

Original article posted on Daily Resource Hunter 

Greg Guenthner

Greg Guenthner, CMT, is the managing editor of The Rude Awakening. Greg is a member of the Market Technicians Association and holds the Chartered Market Technician designation.

Recent Articles

Buy the Dips: Why the Pullback in US Shale is Only Temporary

Matt Insley

Since early July, there's been a sharp pullback in the prices of most major U.S. shale players. Is this the start of a long-term meltdown, or is this simply a great opportunity to "buy the dips"? Matt Insely explores, and offers four specific ways to play the trend. Read on...


A Federal Program that Could Turn Your Town into a Warzone

Chris Campbell

Media coverage of the situation in Ferguson, Missouri has documented a very disturbing trend in local law enforcement... namely, why is a small town police force armed to the teeth with military equipment? Well, as Chris Campbell explains, it's all thanks to a little-known Pentagon agenda called the "1033 Program." Read on...


The New Bitcoin Trend that Could Make You $100,000 Per Month

Josh Grasmick

Few investments have yielded better returns for early investors than Bitcoin. But now that the price has stabilized, are there any gains left to be made? Today, Josh Grasmick details one investable Bitcoin service coming online that could still lead early investors to massive profits... and with less speculation and risk. Read on...


Maestro
Preserve Your Wealth in the Face of Financial War

James Rickards

The Cold War introduced the world to a terrifying new phrase: mutually assured destruction. Thankfully the cold war ended without ever realizing this outcome. But the remnants of that "balance of terror" between the US and Russia still exist... and are beginning to surface in the financial sector. Jim Rickards explains...


How to Use Market Forecasts to Your Advantage

Greg Guenthner

'Tis the season for fall market predictions. But don't dust off that crystal ball just yet. Good traders don't try to predict when an important price move is going to happen - they just react when it does. However, as Greg Guenthner explains, forecasts can help you manage your risk/reward, as well as your non-trading portfolio. Read on...