Energy has solidified its spot atop the GS Scores; it’s by far the highest-rated sector and counts three underlying groups among the top-ten industries out of all the sectors. Valuations have only improved amid steady outperformance, and renewed capital discipline looks to remain for the foreseeable future.
The Energy sector emerged as the top performer for January, a nice respite after a terrible 2020—but not exactly a good omen. Unlike in horse racing—where the concept of “early speed” has significant predictive power—the early leader in the sector-performance sweepstakes hasn’t reliably followed through in the last 30 years.
Fundamentally, we don’t have much new to say on the disaster that Energy-sector equities have become. Mostly, we want to illustrate the danger of assuming that the stocks of commodity producers will necessarily follow the path of their underlying commodities.
The “robustness” of the “Cheapest Sector Strategy” concept is illustrated by strong results across all rebalancing frequencies.
We revisit commentary we published in 2015 regarding the late-2014 oil price crash and review why, at that time, we believed oil prices could stay at depressed levels for a longer period than most expected. Additionally, we advise avoiding two Energy sector segments: companies with high balance-sheet risk, and Energy Royalty Trusts.
Remember the special amplifiers used by the fictional rock group Spinal Tap that could be dialed up to eleven? S&P’s decision last year to designate Real Estate as a full-fledged sector means that our GS rankings can now be dialed down to eleven, and unfortunately the Energy sector has been a frequent occupant of that undesirable spot.
Last month we wrote that a big March gain would trigger a Very Long Term (VLT) Momentum BUY signal on the S&P 500 (Chart). The month’s 6.8% S&P 500 gain wasn’t quite enough to do the trick, but we’re intrigued that VLT did issue BUY signals for three of the market’s cyclical sectors, including Energy, Materials, and Industrials.