Monday, July 8, 2013

Jobs Up, Interest Rates Up, Buy Cyclical Energy Stocks

Over the past 6 months, I have watched the steady under-performance of the large cap oil stocks such as Exxon Mobil (XOM), ConocoPhillips (COP), BP (BP) or Royal Dutch Shell (RDS.A). Even the recent stir in Egypt, although producing a risk premium in the near-term price per barrel of crude, is not sparking a major rally in large cap oil stocks.

The relative under-performance to the S&P500 (SPY) index of the major integrated oil companies since the beginning of February 2013 is very distinct in the graph above. This is after an extended period in which the stocks and the market index were highly correlated. Given the change in economic fundamentals recently and the rising rate market environment we are now entering, this break down in correlation may be a market signal of a value play in the making.

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