foxex: Demanding Energy

Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Friday, December 06, 2019

1. Labor statistics post extremely high mark

2. Energy sector stocks surge ahead

3. The winners within the energy sector

Market Moves

Stocks closed higher in response to a surprisingly strong result in the Non-Farm Payroll report. The monthly data point drove broad market indexes one percent higher on the day and brought them near to last month's historic highs. The S&P 500 (SPX) closed .9 percent higher while the Nasdaq 100 (NDX), Dow Jones Industrial Average (DJX) and the Russell 2000 (RUT) all notched gains of greater than one percent.

The labor report was released this morning before the markets opened and caused the indexes to gap up at the open. To understand just how unusually strong the data was on this report, it is worth noting that of the 480 times this report has been given over the last two decades, the number of jobs that were created exceeded this last report only 22 times, putting this report's news in the top five percent of all such results (see chart below).

It is true that this month's report included a significant amount of seasonal hiring, but comparing this month's number with all November and December reports (where seasonal hiring would be reported) only four times out of the past 40 occurrences reported higher than today. This information correlates well with the Cyber-weekend sales figures which broke records and the unemployment figure which is currently at a 50-year low of 3.5 percent.

Energy Sector Stocks Surge Ahead

When the Non-Farm Payroll report denotes continued strength in the U.S. economy, it usually has a positive impact on the U.S. dollar as investors assume their money will find both more safety and opportunity being put to work in that kind of an economy. That is how things worked out today as the Greenback rose significantly against the Euro and other currencies.

When the U.S. dollar increases in value, it is mathematically expected that anything an investor could buy with U.S. dollars will go down in value. Astute investors therefore look for exceptions to this rule in order to find signals of unusual demand or supply. One particular exception stood out today in the price of oil and oil-and-energy-related stocks.

This is all the more notable because energy-sector stocks have lagged significantly behind the rest of the market all year, though they have begun to rebound lately. As the price of oil rose today on news that oil inventories dropped more than expected, a significant change in energy-sector stocks was to be expected. The chart below compares State Street's Energy Sector ETF (XLE) with the S&P 500 tracking ETF (SPY). The candle size underscores the fact that the energy sector increased by more than double the move in the broad market index. This sector was the only sector with such a significant move higher on the day.

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The Winners Within the Energy Sector

Several stocks within the energy sector have largely outperformed the S&P 500 for the past month or so. Consider the following chart which compares the share performance of several companies in the sector including Halliburton (HAL), Schlumberger (SLB), Exxon-Mobil (XOM), Chevron (CVX), Enbridge (ENB), and Concho Resources (CXO). Though the biggest of these have continued to lag the market so far, the smaller companies in this group tend to be faring better.

The Bottom Line

Stocks notched higher nearly completing a full retrace of the recent drop in prices. The move higher was spurred by the strong labor data reported today. Energy stocks jumped comparatively higher with Halliburton and Concho Resources leading the way.