12/9/15   Blood In The Oil Patch

Editor’s Corner

Ron Rowland

When it comes to the human desire for locking in a bargain on Wall Street, there is probably a little “bottom fisher” in all of us. Who wouldn’t want to be the person who backed up the truck and bought stocks aggressively at a panic low? Fortunes can be made when this strategy is executed correctly. Sounds easy enough, but these bottoms are not always obvious in real time, and false bottoms have bankrupted many a person who bought too early.

Blood may not be running in the streets, but it is definitely running in the oil patch. Crude oil settled at $37.51 a barrel yesterday, its lowest price since the height (depth) of the financial crisis in early 2009. A year earlier in 2008, crude oil was selling for $140 a barrel and headed higher. No one thought oil prices could drop more than $100 per barrel.

Energy stocks have been taking a beating in the current downtrend. The overall U.S. Energy sector peaked in June 2014, flirted with bear-market territory (-20%) in October of that year, and was down more than 25% by mid-December. It never recovered from that decline and is down another 20% in 2015. That’s just for the broad-based funds. More narrowly defined niches of the Energy sector have fared much worse.

Excluding leveraged funds, the worst-performing energy-related funds are those focusing on MLPs, natural gas, and energy infrastructure. The Yorkville High Income MLP ETF (YMLP) is off nearly 19% in December, down more than 34% since early October, and is looking at a year-to-date return of -53%. The First Trust ISE-Revere Natural Gas ETF (FCG) has produced even worse results by dropping nearly 36% since early October and more than 57% for the year.

These stock groups have seen some panic selling this past week, especially on Monday, and it is tempting to theorize that they can’t go any lower. Indeed panic selling typically provides an excellent entry point, but that doesn’t mean it will be clear sailing from that point forward. August 24 was a day of panic selling for these funds. FCG was nearly 20% higher just a week later. However, if you didn’t take your profits at that time, then you might have rode the next wave down about 22% to the panic selling of September 29. The previous cycle was repeated with a seven-day rally of 34%, setting up the 36% decline into Monday’s panic selling.

Each of these prior buying opportunities have subsequently led to new lows. One of these times, the panic selling will produce the ultimate bottom and the perfect buying opportunity. Perhaps it happened on Monday, but only history will tell.

Investor Heat Map:12/9/15


Technology retained its first-place ranking for a seventh week and extended its lead over the other categories. Consumer Staples surged from eighth to second as investors sought its defensive characteristics against the backdrop of recent market volatility. Telecom jumped four places to third, and Consumer Discretionary held steady in fourth. The dramatic climbs of Consumer Staples and Telecom forced other sectors lower. Financials fell from second to fifth, Industrials dropped four places to seventh, and Materials slipped from sixth to ninth and flipped from green to red in the process. Utilities lost momentum but still managed to climb out of the basement to tenth. The big loser this week was Energy. It lost 47 momentum points (an extreme level for one week) and increased the number of sectors in the red to three. It fell only one place in the rankings for the simple reason that it is impossible to fall any lower than the bottom.


Mega-Cap continued its grip on first place, and Large-Cap Growth still occupies second. However, the remainder of the field was shook up this past week. The former all-green lineup now has seven style categories in the red. Additionally, Mid-Cap Growth soared from last to fourth, and Small-Cap Value plunged from third to tenth. This was not a wholesale rotation from Value to Growth, though, as Large-Cap Value climbed three places to fifth. The four categories at the top represent a mixture of large capitalization and growth-oriented stocks, or what is known as the upper-right-hand corner of the traditional style box. The four categories at the bottom of the rankings represent the opposite corner of the style box – those representing smaller companies with value characteristics.


Unlike the big changes noted in the sector and style rankings, nine of the 11 global categories are in the same ranking position as a week ago. The two that swapped places barely budged, but China did manage to move slightly ahead of World Equity. Trend identification is another story, as five more categories slipped into negative trends. This leaves the U.S. as the lone global category that has not succumbed to the downside. However, momentum for the U.S. is declining, and it is now in jeopardy of flipping to red. The four categories at the bottom all saw significant declines this past week. Canada was especially hard hit. Our Canadian benchmark, the iShares MSCI Canada ETF (EWC), has a better than 19% allocation to the Energy sector and another 9% in Materials. Additionally, the Canadian dollar is one of the worst-performing currencies we track, which only adds to the overall weakness.

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.


“The way to make money is to buy when blood is running in the streets.”

-John D. Rockefeller (earlier versions often attributed to Baron Rothschild)


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