You Think the Energy Sector Looks Bad Now? Stick Around…

  • SumoMe

Well if you follow the markets at all then you certainly don’t need me to tell you that the energy sector has been pummeled over the past 14+ months.

(See also Life Beyond Buy and Hold)

As you can see in Figure 1 (unless you are the squeamish sort, in which case may I suggest you simply avert your eyes and pick up reading after Figure 1…Oh, and definitely do NOT look at Figure 2), ticker XLE – an ETF that tracks stocks in the energy sector – has lost over 37% of its value since the high in June 2014.1Figure 1 – Energy sector stocks (ticker XLE) have taken a beating (Courtesy: AIQ TradingExpert)

There is a great deal of speculation regarding the outlook for energy stocks – both in the near-term and going forward.  If you scan the internet you can find compelling arguments of why energy stocks are now a bargain – and equally compelling arguments that much worse is still to come.

I don’t have any “predictions” to offer. I mostly just stick to trying to identify the trend “right now” (which by the way works pretty well) and look for clues from the past as to what the future “may” hold.  While the energy sector has bounced off of a low in recent weeks there can be little argument that on a trend-following basis, the sector is still in a downtrend.

In addition to this, consider the following seasonal trend for energy stocks.

A Bearish Seasonal Trend for Energy Stocks

Energy stocks have demonstrated a tendency to perform poorly between:

*The end of September Trading Day #10 (in this case, September 15, 2015)

*The end of November Trading Day #14 (November 19, 2015).

How poorly, you ask?  To measure historical results we will use Fidelity Select Energy Services (ticker FSESX) which started trading in December 1985.  The growth of $1,000 invested in FSESX only between September Trading Day 10 and November Trading Day #14 every year starting in 1986 is displayed in Figure 2.2Figure 2 – Growth of $1,000 invested in FSESX only from Sep Trading Day 10* through November Trading Day 14* (1986 to present)  (*As of close on designated trading day of the month)

For the record:

*$1,000 declined to $120, or a net return of -88%

*$1,000 invested in FSESX on a buy and hold basis grew to $7,994, a gain of +699%

*$1,000 invested in FSESX during all days EXCEPT this unfavorable period grew to $66,595, a gain of +6,560%

Figure 3 displays the annual gain or loss achieved by FSESX during the unfavorable September TD 10 through November TD 14 period each year since 1986.

1986 (0.1)
1987 (39.1)
1988 (11.9)
1989 (1.0)
1990 (24.0)
1991 (7.7)
1992 (5.2)
1993 (2.9)
1994 (0.4)
1995 (7.5)
1996 17.0
1997 (3.4)
1998 (7.7)
1999 (0.1)
2000 (17.5)
2001 4.2
2002 7.1
2003 (3.1)
2004 6.8
2005 0.4
2006 8.5
2007 (0.1)
2008 (60.1)
2009 0.6
2010 20.6
2011 (5.9)
2012 (11.9)
2013 2.9
2014 (15.2)

Figure 3 – Energy “Unfavorable” period year-by-year

For the record:

*This period showed a gain 9 times (31% of the time)

*The average gain during these 9 years was +7.6%

*This period showed a loss 20 times (69% of the time)

*The average loss during these 20 years was -11.2%


So are energy prices certain to plunge between now and mid-November?  Certainly not. As badly beaten down as energy stocks are a new bull market could begin at any moment.


*The trend at the momeht is inarguably “down”, and

*The seasonal tendency for the next two months has not historically been favorable.

We all make choice as investors and traders and we have to live with those choices.  At this point I am OK with waiting a little while longer before looking to play the long side of the energy sector.  If a big rally unfolds in the meantime, so be it.

The current trend of energy stocks and the historical performance of energy stocks during late fall suggest that a little bit of patience may be in order.

Jay Kaeppel