Rebound in Energy Stocks has life

By EidoSearch

“The real glory is getting knocked to your knees and then coming back.” – Vince Lombardi

U.S. Energy stocks were up about 17% this year through June 23rd, more than doubling the return of the S&P 500.  Since that time however, they are down more than 4% including a 6% drop in just two weeks from July 24th to August 7th.  The S&P 500 weathered the short term pull back a bit better and is up close to 2% over the same two month period.  Was the larger correction in Energy justifiable, or was it overdone and there’s more life in the short term rebound?

Historical analogs are valuable in environments like this, where investors want to understand how the market typically reacts to these situations.  If you’re a fundamental investor, and your belief is that these stocks are still overvalued, then does this represent a good time to be short or underweight?  If you feel the group is now undervalued are there good buying opportunities?  Understanding price trends, and having a gauge for typical market reactions to these environments can be extremely valuable to maximizing profitability with position sizing and entry points to complement fundamental investment decisions.

EidoSearch looked at the last 3 months price trend in U.S. Energy stocks (Morningstar Energy Index) to objectively find similar the most similar historical instances and to understand what typically happens next.  Or, stated another way, we’re finding similar environments in the Energy Index’s history where there was a significant short term drop and then the beginning of a rebound.  Our algorithms found 11 similar instances of the current 3 month price trend dating back to 1995, and in 9 of 11 Energy stocks are up in the next 1 month and the average relative return to the S&P500 is 4.9%.

Current 3 month price trend for the Morningstar Energy Index ($MSE)

MSE1

The only two historical instances that are down in the next 1 month are from 1995 and 1997, otherwise the most recent 9 instances of this current 3 month price trend in Energy Stocks has been up every time in the next month as displayed below:

MSE2

Replicating the Market Call in EidoSearch (Clients Only)
  • – Go to New Search tab, select Indices, type in $MSE and hit Enter
  • – Select the 3 month tab at the top of the chart, and then hit Search One at the bottom of the chart
  • – Click on Return Chart to get the 1 month projection, as well as the historical analogs and other underlying analytics
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