For the third straight week, energy led the pack.
The State Street Energy Select Sector ETF (XLE) climbed another 3.4%, making it the best-performing sector ETF once again.
We all know why…
Fighting between Israel and Iran has reignited concerns over global oil supplies. The Strait of Hormuz remains effectively impassable, and the U.S. Strategic Petroleum Reserve is hovering near its lowest level since the 1980s. Of course, you know I don’t trade headlines. By the time news makes it to CNN or Fox, Wall Street has usually spent days digesting it.
What matters is what my system says.
So today, let’s see what it’s telling us about energy.
Higher oil prices are great news for energy companies. They’re much less welcome for everyone else.
Every extra dollar spent filling the gas tank or keeping the house cool is a dollar that isn’t spent at a restaurant, on a vacation or buying a new pair of shoes. That’s exactly what showed up in last week’s sector performance.
The State Street Consumer Discretionary Select Sector ETF (XLY) fell 5.3%, making it one of the market’s biggest losers. The State Street Communications Select Sector ETF (XLC) wasn’t far behind, dropping 3.9%.
So, what sent communications lower?
It was dragged down by AI spending.
Alphabet’s (GOOGL) earnings were outstanding, but investors fixated on one number: capital spending. Management’s plans to pour even more money into AI infrastructure renewed concerns that the industry’s spending spree is getting out of hand, sending the stock lower and weighing on the entire sector. Now, we’ll find out whether those fears spread. Microsoft (MSFT), Meta Platforms (META), Apple (AAPL) and Amazon (AMZN) all report earnings this week. Their guidance – and Wall Street’s reaction to it – will tell us a lot about where AI stocks head next.
Key Insights:
- Buoyed by the Iran war, energy stocks continue to push higher.
- High energy prices are making life difficult for consumers and weighing on discretionary stocks.
- The AI hyperscalers continue to get hammered by a skeptical Wall Street.
Three in a Row for Energy
I sincerely hope we’re not in the early stages of another “forever war.” But for the moment, it’s hard to see an obvious path to a lasting peace.
The longer the war drags on, the higher the prices of oil and gas go. That’s good for American energy stocks, of course.
I am extremely bullish on energy stocks. But it has nothing to do with the Iran war. It’s because my system has identified the sector as being highly likely to outperform.
It really is that simple.
As I do every week, I ran my customary screen of the biggest movers in the sector that were still within 10% of their 52-week highs last week. The idea is to look for solid, market-leading stocks that are getting stronger.
Here’s what I came up with:
It’s essentially the same core of stocks from the past two weeks. And today, as was the case for the last two weeks, every single stock on this list rates as “Bullish” or “Strong Bullish” on my Green Zone Power Ratings system.
American pipeline and infrastructure plays are in a good place.
The AI boom has created unprecedented demand for energy at a time when conflicts in Iran and Ukraine have crimped supply. As a result, the U.S. is in a unique position as a net energy exporter.
And unlike some of our trading partners in Europe and Asia, there is little chance of American pumps literally running dry.
I can’t tell you if or when we will have peace again. But I can tell you that my system sees a long runway for growth here.
About Those High Energy Bills…
While high energy prices are great for American energy stocks, they’re not so great for those of us with gas tanks to fill and houses to keep cool. And apart from high energy costs, stubbornly high inflation at the supermarket has elevated the cost of living.
We’re seeing this reflected in the prices of consumer discretionary stocks.
So, might there be some bargains following the selloff?
Let’s see what my system says.
I ran my customary screen of the sector’s biggest losers for the week that are still trading within 10% of their 52-week lows. The idea is to find beaten-down gems that look poised to recover.
Unfortunately, there’s not a lot of green here…
Not a single consumer discretionary stock rates as “Bullish” on my Green Zone Power Ratings system. Lululemon Athletica (LULU) and Copart (CPRT) rate as “Neutral.” The rest rate as “Bearish.”
The biggest loser last week was Tesla (TSLA). As was the case with Alphabet, Wall Street didn’t love Tesla’s planned massive capital spending.
There will likely come a time when we’ll want to buy Tesla with both fists. It is, after all, one of the world’s leading tech stocks and an emerging powerhouse in clean energy.
But for now, my system is telling us to steer clear.
To good profits,
Adam O’Dell
Editor, What My System Says Today
P.S. Every great investing cycle creates a new class of winners. In the last decade, it was chips and software. In the next decade, it’s shaping up to be the companies supplying the world’s most critical resources.
That’s exactly why Grey Swan Founding Director Addison Wiggin recently teamed up with Grey Swan Contributor Shad Marquitz to launch The Grey Swan Resource Investor earlier today — to help investors find the companies controlling tomorrow’s bottlenecks before Wall Street catches on. Learn more here…