Energy Breadth

The percentage of stocks trading above a certain moving average is a common breadth reading which measures the participation of stocks in an underlying index. Given all the heightened volatility surrounding crude oil, I couldn’t think of a better sector to focus on than the energy. The energy sector was the worst performing sector in 2014, losing over 8% on the year, but dropping 25% from its peak in June 2014.

The chart below depicts the Select SPDR Energy ETF (XLE) and the percentage of the stocks in the ETF that are trading above their respective 50-day moving averages. (Given the sharp decline in XLE, it didn’t really make sense to look at the 200DMA just yet). XLE currently has 43 holdings with the top 5 consisting of:

  • Exxon:                 16.5%
  • Chevron:             13.2%
  • Schlumberger:  7.1%
  • Kinder Morgan:  4.3%
  • EOG Resources:  4.0%

Looking back in retrospect, it’s easy to spot the “warning” signals. In April 2014, the % of stocks above their 50DMA was at 100%, yet the XLE continued higher and peaked in late June. In other words, breadth was deteriorating months before the collapse in the XLE. There was a period between September & October 2014 where all the components were below their 50DMA, so there was really nowhere for breadth to go but upwards. Seasonally, February is a strong month for XLE so it is interesting to monitor the trend of the underlying names. I am not one to call bottoms, but the rapid waterfall in XLE has seemed to lighten up and prices are consolidating. In terms of recent breadth, nearly 56% of the underlying components are above their 50DMA 

Tom PsarofagisComment