08/03/16   Energy Recovery Iced

Editor’s Corner

Ron Rowland

Oil prices peaked eight years ago. It was the summer of 2008. Crude oil was trading above $150 a barrel, and predictions of $200 oil were common. Other commodities were also enjoying huge price advances, as the “China miracle” was in full bloom. U.S. stocks were down more than 10% from their 2007 peak, which defines a correction, but the media was still referring to it as a credit crunch. The average investor had no idea what was about to be unleashed.

Crude oil dropped precipitously. By early September, it had retreated to $103 a barrel, but it didn’t stop there. From June 2008 to January 2009, oil plunged from $151.72 to $46.86, erasing more than two-thirds of its value in just seven months. Stocks, as measured by the S&P 500 Index, had entered a bear market by mid-September and were trading more than 45% below their peak when oil bottomed. Stocks continued to fall lower another month or two but then embarked on a seven-year recovery that is still in place today.

The S&P had recovered all of its losses by the first half of 2013, but oil was another story. It was hovering around the $100 mark at that time, more than 33% below its peak. The $100 level gradually became the new expected and accepted price. It was the “norm” for more than four years, until the next big move. However, the next move was not bullish.

From mid-2014 to early this year, crude-oil prices moved aggressively lower in two major waves. Each wave was more than a 50% drop, or more than 73% from start to finish, including the intervening 25% rally. From June 2008 to January 2016, crude oil went from $151.72 to $28.50, a plunge of more than 80% based on month-end prices.

At that point, speculators and traders were convinced the bottom had been established. The ensuing rally had a volatile beginning but seemed to have legs. When the price approached $50, the oil recovery became real. Prices briefly moved above $52 in June, but were back below $40 this week. Technically speaking, that constitutes a new bear market for oil because it is a price decline of more than a 20%.

Being a commodity, oil prices are subject to the laws of supply and demand. The eight-year bear market for crude oil has seen both. High global demand drove prices higher, flowed by falling prices as that demand weakened. Then supply ramped up, especially in the U.S., which brought about the 2014–2016 price drop. This caused production to slow, but it started coming back online as prices approached $50. The current drop is partly due to extra supply and partly the result of weakening demand. It’s the prospect of weakening demand that has market watchers worried at this time. The stock market continued to move higher when oil prices were falling due to supply gluts. However, when oil declines due to weak demand, that’s a sign of an economic slowdown and its potential to bring about a bear market for stocks.

Sectors
Real Estate is at the helm for the second week despite the pullback in many high-yielding equity groups. Technology continued its recent rise, edgecharts-2016-08-03this week climbing two spots to second after being next-to-last just three weeks ago. Health Care advanced from fifth to third on strong gains in biotechnology and medical equipment stocks. Last week, Telecom relinquished its first-place spot to Real Estate, and this week it slipped two places lower to fourth. Materials also moved two spots lower despite big upside moves for precious metals and miners. Utilities and Industrials lost momentum but managed to hold their places. Financials and Consumer Discretionary swapped places, with Financials gaining the upper edge. Consumer Staples trails all but one sector, with Energy being the one exception. Energy posted a terrible week and flipped back into a negative trend as oil prices dropped below $40 a barrel.

Styles
Small-Cap Growth ascended the final two steps to the top. This marks the first time in 45 weeks that one of the Growth categories has been at the top of the style rankings. However, size is still the dominating factor, as the Small-Cap Blend and Small-Cap Value round out the top three. Congestion is evident in the middle of the rankings, with only two momentum points separating the next six categories. Mid-Cap Value heads up this group that encompasses the other two Mid-Cap categories, Large-Cap Growth, and the Micro-Cap and Meg-Cap extremes. Large-Cap Blend just missed the cutoff to be included in the above group, and Large-Cap Value has now replaced Mega-Cap at the bottom.

Global
Latin America and Canada are the only two categories that have occupied the top spot of the global rankings for the past 26 weeks. Latin America has held the honor for 16 of those weeks, including the past seven. Its lead has been shrinking the past couple of weeks, and now Emerging Markets and Pacific ex-Japan—in second and third, respectively—are putting forth a legitimate challenge to the top. China, the U.S., and World Equity are in the next three spots and round out the top-six group of global categories. Shifts among the lower-ranked categories included Japan moving ahead of Canada, and the U.K. falling from 10th to last. The Eurozone, after six weeks on the bottom, managed to move a step higher.

 

Note:

The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.

 


“We need to be prepared for lower prices and volatility. It’s going to take well into 2017 before we see any real increases in prices.”

Ryan Lance, CEO of ConocoPhillips


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