FINALLY... Energy Gives a Buy Signal!

One of the things I periodically check is the twelve-month relative performance for the various S&P 500 sectors relative to the broad index. This type of analysis can give clues to out-of-favor investments that may be due for a bounce or in-favor investments that may be a bit stretched on the upside. In essence, it helps provide good contrarian plays for overweighting or underweighting sectors. I smooth the data and then look for buy or sell crossing points in the moving averages for when to shift in or out of a sector. For example, I received a very timely sell signal on energy on August 15th 2008 and have waited for a buy signal ever since. FINALLY, after nearly two years we have a buy signal on the 12-month relative performance differential for energy, which came on August 8th 2010. While the buy signal was given nearly four months ago there is still likely more outperformance by the energy sector relative to the S&P 500 ahead.

As mentioned above, I like to periodically look at how the 12-month relative performance spread for the S&P 500 sectors are doing and commented upon it in an article written back in April of this year called, "Revisting The Dual-Edged Sword of Investing: Risk vs. Reward”. From my vantage point at the time, I saw two key sectors that stood out as the most attractive buying opportunities: telecommunications and energy. In regards to telecommunication, the following commentary and chart from the April article were highlighted:

Laggards—More reward than risk at this juncture

At the other end of the relative performance extreme are sectors traditionally viewed as defensive or less tied to the general economy than cyclical sectors. What absolutely takes the prize as top underdog is the S&P Telecommunication sector, which has grossly underperformed the S&P 500 by the widest margin in more than two decades. The sector sports the highest dividend yield (5.81%) of all S&P 500 sectors as well as the third lowest trailing P/E (13.58), making it a bargain among its sector peers. (more)