The rally continues and given Tuesday’s ability to close near highs of the session, while DeMark indicators remain early (by 3-4 days) it looks likely that indices push a bit higher over the next few days before any stalling out. The QQQ daily chart below highlights the recent breakout, and Tuesday’s ability to climb over the 50% retracement area of the high to low range. Near-term targets lie at 363.42, the 50% retracement of the decline from November. While not immediately expected, targets above would come in near 374.
Former Energy laggard Groups like Oil Services, Drilling now playing catch-up
Interestingly enough, despite WTI Crude having pushed up to the highest levels since 2008, certain groups have not really participated. Field Services is certainly one that comes to mind with stocks like Schlumberger still 65% off all-time highs, and Oil Drilling is another.
That now looks to be changing, and stocks within the Drillers and Oil Services groups are just starting to break out of lengthy long-term downtrend lines that make these names appealing to start to play catchup after a lengthy period of underperformance. Most of these names aren’t nearly as overbought and still appear like excellent risk rewards.
The monthly chart below highlights the Oil and Gas Drilling industry group, which has just exceeded downtrends going back since 2014. As this chart shows below, despite Crude having soared to multi-year highs, this group has not even recovered 50% of its weakness since 2008.
Its recent eight-year downtrend line breakout bodes well for additional upside follow-through from names like HPQ 0.02% , PTEN 1.16% , RIG 4.26% , and DRQ.
Thus, while some might feel they’ve missed the move, that doesn’t look to be the case at all. Many stocks like SLB (which represents 19% of OIH) remain down over 65% off all-time highs from 2014, over eight years ago. Thus, as the saying goes, “a rising tide carries all boats” I feel the Drillers still look actionable despite Crude having gotten overbought.
Oil Services has just broken out relatively vs Integrated Oil & Gas
Digging a bit deeper into these sub-group relationships within Energy, it looks like OIH is finally starting to kick into gear. While XLE (Energy Select SPDR etf) has been the preferred choice over OIH (VanEck Oil Services ETF) since last May, that looks to be quickly changing. Ratio charts of OIH to XLE have just broken out above downtrends formed from relative peaks last Spring. This is constructive towards expecting further relative strength out of the Field Services parts of Energy like SLB 0.71% which have broken out of lengthy long-term downtrends, yet remain down over 65% off all-time highs.
Looking back, the Integrated Oils have largely outperformed since last Spring, while the Exploration and Production stocks have recently kicked into gear and have shown very good strength with ETF’s like XOP -0.19% having broken out to the highest levels since 2018, surpassing a seven-year downtrend in the process. The next part of this rotation now looks to be happening with Field Services names and the Drillers. While I still expect XOP to continue its technical dominance, it might be the case that XLE starts to lag a bit while OIH plays catch-up.
This daily chart below illustrates this exact point. While OIH outperformed XLE since the market bottom in March 2020 into May 2021, that gave way to a breakdown last Spring and many Oil Services names lagged. However, this now looks to be changing yet again. This nine-month downtrend in relative performance of OIH to XLE was just exceeded last month. Thus, while the Exxon’s and Chevron’s of the world have already made their move, now it looks time for Schlumberger and Halliburton.
OIH has SLB 0.71% , HAL 0.30% and BKR 0.52% which comprise 40% of this ETF, yet also has a healthy constituency of various Drillers like HPQ 0.02% , PTEN 1.16% , RIG 4.26% and DRQ to name a few.
Thus, overweighting and/or favoring OIH to outperform XLE makes sense given this recent technical breakout and should allow for some meaningful catchup.
Finally, examining the relationship between XLE and XOP shows why it might be time to favor Exploration and Production issues as the Integrated heavy XLE rolls over in ratio form vs. XOP. This former uptrend had nearly exactly hit the same levels as last Summer before stalling out. Thus, this resistance held for the third time since last Spring and now this ratio has broken the uptrend from last November. Overall, it looks likely that XLE underperforms XOP in the weeks/months ahead given this breakdown in the relative chart.
