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Sector Relative Strength: Energy and Financials

by: Bespoke Investment Group August 21, 2008 | about stocks: IYE / IYF / XLE / XLF    

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As has been the case for several months now, the two sectors garnering the bulk of investors' attention have been Energy and Financials.  Below we highlight the relative strength of both sectors versus the market over the last year.  In each chart, when the line is rising it indicates that the sector is outperforming the S&P 500, and vice versa when the line is falling.  Additionally, the red dots indicate days when the Fed cut rates.

Regarding the Energy sector, throughout the entire Fed easing cycle, oil and energy stocks rallied.  It wasn't until shortly after the Fed went on hold that the sector began to crack.  The Financial sector had a brief rally beginning in Mid-July, but the strength quickly evaporated when the sector approached its downtrend line from the start of the year. 

As investors have shifted out of Financials, the Energy sector has seen some renewed strength in recent days.  This strength has been attributed to the Russia/Georgia skirmish and concerns over the dollar following a possible Treasury bailout of FNM and/or FRE.  The more likely explanation, however, is that nothing moves in a straight line.  Just as Financials have had several rallies throughout their downtrend, if energy stocks are in the beginning of a long-term downtrend, you can expect to see several short term rallies.

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Sector_relative_strength_2

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This article has 3 comments:

  •  
    Aug 21 01:58 PM
    "The more likely explanation, however, is that nothing moves in a straight line......f energy stocks are in the beginning of a long-term downtrend, you can expect to see several short term rallies."

    Thank you! It made absolutely no sense that the market **just woke up** and noticed the issues between the US and Russia....

    Similarly, at the third week of every month, the newscasters seem amazed that the market is in turmoil.... Helloooooo... Options expirations....

    jegan ;-)
    Reply
  •  
    Aug 21 02:11 PM
    With the impending collapse of an AIG, WAMU, LEH, or other BK candidates, the only place to be is short or cash at this point.
    Reply
  •  
    Aug 22 08:22 PM
    If the financials are similar to the energy sector in their down trend please tell me which energy companies have had to be bailed out by the govorment as is the case with financials .
    Reply
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