An Energy Sector Breadth Thrust from Oversold to Overbought

Key points:

• The number of S&P 500 energy stocks above their 10-day avg cycled from 0% to over 90% in 21 days
• After the signals, the energy sector showed inconsistent win rates in the 60% range
• If we include a trend filter (rising 200-day MA), the 6-month win rate improves to 82%

A trading model that measures a reversal in trend participation

The percentage of S&P 500 energy members trading above their respective 10-day moving average registered an oversold-to-overbought reversal buy signal last week.

The trading signal identifies instances when the number of S&P 500 energy members trading above their respective 10-day moving average reverses from = 0% to > 90% in 21 sessions or fewer.

The signal alone shows unstable win rates, hovering around 58% to 69%

This model generated 52 other signals over the past 30 years. After the signal, the energy sector showed a mixed performance. The win rates are not particularly compelling, hovering in a range of 58% to 69% across most time frames. 

If we include a trend filter, the sector rallied 82% of the time 6 months later   

If we include a trend filter that requires the energy sector (XLE) to be in a long-term uptrend (i.e., a rising 200-day moving average) when the reversal occurs, the results improve substantially. After the others, the 6-month win rate jumps from 69% to 82%. This suggests that this powerful breadth thrust is much more reliable when it occurs within the context of an established bull market. 

While the upside has been significant (median max gain of +14.9% at 6 months), the median max loss at the 6-month mark was -7.1%.

This filtered signal in the energy sector has also historically been a positive sign for the broader market.

The table below lists stocks in the Energy sector along with their absolute trend scores and relative trend scores.

What the research tells us...

When energy sector members trading above their respective 10-day average reverses from oversold to overbought, the momentum thrust begets more momentum. Similar setups to what we're seeing now have preceded rising energy stock prices, especially in the 6-month window. If we include a trend filter, the signal results look even better.