Oil vs. Oil Stocks

After reading yesterday’s blog, which highlighted oil’s breakout, a close friend called and asked if it was time to buy oil stocks. With some concern in our voice, we quickly answered, “No!” The rationale was that we don’t buy stocks in a down market. Technicians tend to believe that 80%-90% of a stock’s move is influenced by the trend of the market. The balance is influenced by sector-specific and (to a lesser degree) company-specific factors.

In recent comments, we have made the case that, while the S&P's intermediate uptrend from the March low is still intact, it appears to be a structural bear market rally. Recent deterioration in the near term indicators, in turn, has been putting increased pressure on the post-March uptrend such that, even if the S&P 500 makes another run at the May 8th highs, the result would likely be more and greater negative divergences than those that already exist.

To put things in perspective, only 65 of the stocks in the S&P 500 are currently benefiting from improving near term momentum as of Thursday’s close (based on a scan using the daily MACD indicator). Of the remaining 435 deteriorating stocks, 289 are still on the overbought side of neutral. Thus, it is not beyond reason to suggest (as we have) that these near term pressures could last through May and possibly into June.

Similarly, none of the 39 stocks in the S&P energy sector (as listed by StockCharts.com), show an improving MACD. Moreover, 33 of the 39 deteriorating energy stocks are still overbought. So, if you believe as we do that the market has more work ahead of it before it is ready for a tradable rally, then it is likely that the same is true for energy stocks – even if oil does rally in the meantime.

In Tuesday night’s post, we reiterated resistance at 930, 944, and 982. But we also mentioned that 912-916 could prove to be important intervening resistance. Since then, the S&P has spent about two hours above that range. But time and again – both before and after those two hours – rally attempts have been repelled by that range. This, plus Thursday’s sell-off to as low as 880, suggests that 912-916 is more important than we gave it credit for.

We have recently been using 879 and 827 as indicated support. Thursday’s decline tested, but did not breach, first support.