Keep Calm and Buy More?


Market Moves

The market closed higher, breaking new territory in all major indexes for yet another day. One might think that this market could be summed up by a slogan on a coffee mug that reads “Keep Calm and Buy More.” And yet the Volatility Index (VIX) ended the day with a slight increase over its previous close, hinting at continued nervousness by option sellers for a notable third consecutive session. 

Meanwhile, one particular sector has been on the rise after having been beaten down for several months, namely the energy sector. The chart below shows a sector analysis and compares nine of State Street’s popular sector-tracking index ETFs. It highlights the S&P 500 fund (SPY) and the Energy Sector fund (XLE). At the beginning of October (marked “then” on the chart), the energy sector was still lagging behind all others, but now it has moved into the middle of the pack, showing acceleration in its price performance that may continue into 2020.

Micro-Cap Index Shows That Investors Favor Risk

The broad market indexes closed mildly higher, but it was the Microcap index (RUMIC) that topped all others, closing up 0.63% at the end of the session. The chart below compares the Russell Microcap and the Russell 2000 small-cap index (RUT) with the larger-cap indexes since Oct. 1. Today’s action extends the trend of these stocks outperforming other asset classes over the same period of time that the energy sector has also been gaining ground.

The important point for chart watchers to observe is that investors are willing to put more resources behind both risky stocks and behind energy stocks. With this evidence making itself apparent, it might make sense for traders to look at a higher-risk, low-cost stock in the energy sector to find opportunities.

Marathon Oil Showing Technical Signs of Turnaround

One particular company that matches this criteria might be Marathon Oil Corporation (MRO). The stock is not only relatively inexpensive at under $14 per share, but the stock’s P/E ratio, like may other stocks in the oil and gas industry, is well below the market average. A low P/E ratio can be misleading to investors if they are not careful to recognize the risks that it implies.

The chart below points out four items of technical evidence that help reinforce the notion that MRO shares may have turned the corner and are about to begin a new upward trend. First, a bullish divergence appears between the price action and the Commodity Channel Index (CCI) indicator. Second, the stock has bumped up against the top of its downward channel three times. Third, the share price has closed above the resistance line in the channel. Fourth, the indicator has maintained its position in the upper range of the CCI, thus confirming the expectation of a continuing upward trend.

The Bottom Line

Stocks moved to historic highs again as the micro caps outpaced all others. This show of preference for risk and opportunity also extends into the energy sector. Stocks in these industry groups are showing relative strength, including Marathon Oil shares.

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