Wednesday, September 2, 2015

Energy Sector Turns Volatile

Just as lateral movement started to pick up, the markets fall again. Upon opening, the Dow Jones Industrial Average dropped 400 points. Weak Chinese data sends tremors through the system once again as Dow futures and the Shanghai Composite traded down earlier. A second correction seems to be occurring today as traders recover from last week's bout with volatility, but that bout is apparently far from over. Disappointing Chinese factory data disrupted crude oil's rebound as well, reversing a three-day trend of gaining 27% to a loss of 7% in one day. On the quieter side, natural gas contracts show less volatility as its monthly contracts show no movements over a penny. This stability could be due to its reactions being heavily governed by domestic demand data as opposed to international. Nevertheless, the natural gas index loses today because of their associations with the crude oil market. The energy sector as a whole seems to have accelerated losses because of the WTI drop that extends drops in that industry initially caused by market volatility. The S&P500 Volatility Index (VIX) increased $4.85 (+17.06%) as investors continue their fret over the volatility levels of the current markets. Further losses could push the market indicator for volatility to $40 levels where they were last week. The S&P 500 Energy Index lost $17.40 (-3.56%) which surpassed the dips posted by the entire S&P 500 Index, $58.33 (-2.96%). Using ratio analysis, we can see that this trend is not odd.


The chart above is a 6-month chart of the S&P 500 Energy companies against the normal S&P 500 Index. The first thing to note is the significance of the underperformance during the summer months.The consistent drop was due to the poor performance of crude oil future's price under the downward pressure of fundamental data. Index activity shifts into a new period of movement at the beginning of August where a month of drops is reversed in a week. The transition period into September has price levels revisiting the Bollinger average after bouncing off the bottom. A slight resemblance to a declining triangle formation hints that bullish pressure is faltering in the face of resuming bearish sentiment. If a bear outlook is adopted, the two similar peaks would be considered new highs and crucial resistance points even though they look to close down on the 50-day moving average. For now, it looks as if sector performance will move laterally with significant pressures from volatility. Investors looking at cheap oil and gas stocks, buying on a downtrend is crucial, and breakouts above that Bollinger ceiling or 50-day moving average are movements into bull trends.

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