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 editor of the Daily Reckoning’s Rude Awakening. Greg is a member of the Market Technicians Association and holds the Chartered Market Technician designation.

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