Two Interesting Stats, More Volatility Ahead, and a Look at Forward Energy Sector Earnings Estimates

A lot is being packed into one blog post. Hope readers enjoy the stats.

Two fascinating stats from Bespoke this past week:

  • “Amidst all of the chaos, the 3-day sum of S&P prices’ distance from its 50-DMA (i.e. 50 day moving average), at each close reached -14.07 standard deviations…an astounding reading bested only by May 15th, 1940, when the Blitzkreig pointed itself at France”.

My comment: I’ve never heard of the “3-day sum at each close” type statistic, and it feels like a little “statistical massaging” but the conclusion is eye-popping. Long term investors take heed. Even though the degree of the correction was about the same – comparing October ’14 to the past two weeks – the VIX’s spike high was 31 in October ’14 and 53.29 this past week.

  • “While performance over the next week has been positive more than it has been negative, the SP 500 has run into trouble in the month following the “Death Cross”. The index’s average 1-month return has been -1.38%…(while) over the next 3 and 6 months, the index has been up significantly.”

My comment: At least one day this past week, the SP 500’s 50-day moving average, fell below the 200-day moving average, thus triggering this comment from Bespoke. Looking at the daily chart of the SP 500 on the technical software, the 50 DMA is sitting right on top of the 200 DMA as of Friday’s August 28, 2015 close. Given the rapidity of the steep correction this past week, and the extreme nature of Monday’s drop and Tuesday’s bounce, it wouldn’t surprise me to see more volatility through September ’15 as angst over SP 500 earnings surface (like it did last year at this time).

Looking at Forward Energy Sector Estimates

Here (click on link below) is an Excel spreadsheet prepared this weekend, using forward and historical Energy sector earnings data from Thomson Reuters:

FCEnergyRtofChange

1.) The top part of the data is to show the “rate of change” the last five weeks for the Energy sector for both full-year 2016, and for the forward individual quarters, i.e. Q3 ’15 through Q2 ’16.

There are two data points of note for readers: A.) Q2 ’16 Energy sector earnings estimates continue to plummet. That is a steep drop for that quarter, and even Q1 ’16, which is a very easy comp to compare against (Q1 ’15) in terms of crude oil pricing, looks like it could still go negative. B.) The full-year 2016 growth estimate, while still falling, is expecting pretty good growth. The Thomson Reuters data through September 30th, only goes out as far as Q2 ’16. Once October 1 ’15 arrives, we will get a look at Q3 ’16 expected growth by sector.

The point is that in terms of expected 2016 Energy sector growth  – as the data falls now – consensus is expecting a very back-end loaded year for Energy sector earnings growth.

2.) The bottom section of the spreadsheet shows actual Energy sector earnings growth. If we look at the 12 quarters from Q4 ’11 through Q3 ’14, the Energy sector “averaged” roughly 6% earnings growth, with some huge disparities in between.

Energy sector analysis and conclusion: My own opinion is that the Energy and Basic Materials sectors vicious rallies late last week, smacked of “bear market” reversals. Now that being said, I am doing a lot of fundamental homework on the Energy sector to initiate longer-term positions. I thought maybe buying Energy for client accounts at the end of Q1 ’15 might work, but after taking a 5% Energy position in some longer-term client accounts, our earnings work (like the kind attached) took me out of the stocks.

Jeff Miller, the excellent blogger at “A Dash of Insight” and a friend from Chicago, noted in this week’s, “Weighing the Week Ahead“, Jeff’s weekly blog update, that investors need to take a longer view of Energy in order to invest in the sector successfully. Jeff makes a good point on Energy (Energy Back in Focus), which is found about 50 – 75% through the blog.

@SeeitMarket also has an article this weekend on how crude oil might have formed a bottom.

My two favorite Energy names presently are Halliburton and Schlumberger.

Conclusion: Expect more market volatility through September, as evidenced by the “death cross” returns cited by Bespoke above. However, historical data like this can be wrong too. Bespoke wrote an article about 6 weeks ago noting the SP 500 consolidation that had formed all year, with the narrow trading band, and how when this pattern “broke” it was usually to the upside. Well, that wasn’t the case, as the last 2 weeks have shown.

Earnings growth for the Energy sector will be better in 2016, than 2015, but maybe not as healthy as a lot of folks think. If we see 10% – 15% Energy sector earnings growth for 2016 as its stands now, that might be “huge” (as Mr. Trump would say).

The fact is that the Energy and Basic Materials stocks will bottom and turn higher long before the forward estimates do, so watch and see if we get a re-test of last week’s $37 – $38 crude oil prices.

 

 

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