Given just how massively technology stocks have crushed everything over the past decade, you might be a little surprised to see tech at the bottom of the heap so far this year. The State Street Technology Select SPDR ETF (XLK) is up a piddling 1.5% in 2026.
Meanwhile, energy and materials are killing it. The State Street Energy Select SPDR ETF (XLE) and the State Street Materials Select SPDR ETF (XLB) are both up a little over 10%, and we’re not even through January yet.
I expect this momentum to continue. As I wrote yesterday, the AI revolution doesn’t magically just spring out of the ether. It requires trillions of dollars in infrastructure investment, and that’s going to require a lot of energy and a lot of raw materials.
Tangible assets also tend to perform better when faith in the system is low. And after years of monetary mismanagement by the Federal Reserve and Congress and a rollercoaster of on-again, off-again trade tensions, confidence is about as low as I’ve ever seen it.
All of this bodes well for the gritty world of commodities, and my Green Zone Power Ratings system confirms it. Energy shares have been increasingly trending “Bullish” for the past several months.
So, today let’s do a sector X-ray of the energy sector. Let’s see what’s driving their “Bullish” ratings and where the biggest winners are likely to be.
A Peek Under the Hood
The bull market of the past several years has been notoriously thin. Returns have been driven by the outperformance of a small number of megacap stocks.
Well, that’s distinctly not the case in energy. At 11 out of 21, a majority of the energy stocks in the S&P 500 rate as “Bullish” and another three rate as neutral. My research has shown that “Bullish” stocks outperform the market by two to three times on average, whereas “Neutral” rated stocks tend to return more or less in line with the market.
Only three stocks rate as “Bearish.”
Those are great numbers for the sector, and simply buying the State Street Energy Select SPDR ETF (XLE) would likely deliver market-beating performance this year given the preponderance of “Bullish” rated stocks.
But why stop there? Let’s keep drilling!
Where Do Energy Stocks Pick Up Points?
My Green Zone Power Ratings system is a composite of six individual factors – growth, value, quality, momentum, volatility and size – each of which has several component subfactors. Let’s see where energy stocks score well, picking up points.
Not surprisingly, given energy’s reputation as a value sector, 17 out of 21 of the energy stocks rate as “Bullish” on their value factor.
Energy has had a rough decade. It’s been largely out of favor since 2015, when the surge in American fracking output led to an oversupplied oil and gas market. Then it got really bad during the pandemic when a short-term collapse in demand caused crude oil prices to briefly turn negative.
All of this had the effect of scaring investors away, which is why the sector rates so well on value.
But here’s the thing…
Energy companies are survivors. To have made it through the brutal 2015-2020 industry downturn, you have to run a tight ship.
So, I’m not surprised to see that 14 out of the 21 – fully two thirds – rate as “Bullish” on their quality factor. And an equal number rate as “Bullish” on their growth factor.
As weaker energy players either folded up shop or merged with stronger competitors, the companies remaining are battle tested and strong. They’re ready for anything this market can throw at them.
If there is a weakness, it is simply that investors haven’t noticed yet. Only five of the stocks rate as “Bullish” on my momentum indicator.
What’s Working Today?
Momentum analysis has always been a critically important part of my investment process. It helps me to avoid value traps or just get into an otherwise good position too early.
So, I did a screen of all energy stocks that rate as “Bullish” on momentum… and also bullish on value, quality and growth. I wanted a list of good companies trading at a reasonable price that have already started trending higher.
This got me three names:
Two of these names will immediately look familiar. I mentioned Halliburton (HAL) and Baker Hughes (BKR) yesterday, noting that both have been jumping higher of late and that both were potential winners from the reconstruction of Venezuela’s energy industry.
Subscribers to my Infinite Momentum Alert will also be familiar with Baker Hughes… the stock is an open position for us and up about 25% since I first recommended it.
Crude oil refiner Valero Energy (VLO) is also a potential winner. Valero has refineries on the U.S. Gulf Coast that are specifically configured to process Venezuela’s heavy crude oil.
Of course, this isn’t our first rodeo with Valero either. In Max Profit Alert, I just closed a put-write income trade that generated an annualized “yield” of 16%, more than six times higher than the stock’s stated dividend yield of 2.6%.
It’s always a risk to invest based on political machinations, as they can change on a whim. If the situation in Venezuela deteriorates, any or all of these companies might lose out on their hoped-for windfalls. But it is worth noting that all three have been in strong uptrends for several months, suggesting that investors saw potential long before Venezuela was on anyone’s radar.
To good profits,
Adam O’Dell
Editor, What My System Says Today
