Data &
Technology
Research
Reports
Report Solutions
Reports Library
Actionable
Strategies
Free
Resources
Simple Backtest Calculator
Simple Seasonality Calculator
The Kelly Criterion Calculator
Sentiment Geo Map
Public Research Reports
Free Webinar
Pricing
Company
About
Meet Our Team
In the News
Testimonials
Client Success Stories
Contact
Log inLoginSign up
< BACK TO ALL REPORTS

Daily Report : Most energy shares trade for less than $5 (even $2); Bond investors start to price in more risk

Jason Goepfert
2020-10-23
In March, almost all U.S. energy companies had a share price below $5. It hasn't changed much since then. A majority have share prices even below $2. This is beyond any other extreme over the past 20 years.; There has been a sudden and large increase in implied volatility in bond options. While this concerns some investors who worry about this bleeding into the stock market, historically a quick rise in bond volatility has not done so. There was a consistent pattern of the VIX dropping in the months ahead, while stocks rose.
View/Print a PDF version of this Report

Headlines


Most energy shares trade for less than $5 (even $2): In March, almost all U.S. energy companies had a share price below $5. It hasn't changed much since then. A majority have share prices even below $2. This is beyond any other extreme over the past 20 years.

Bond investors start to price in more risk: There has been a sudden and large increase in implied volatility in bond options. While this concerns some investors who worry about this bleeding into the stock market, historically a quick rise in bond volatility has not done so. There was a consistent pattern of the VIX dropping in the months ahead, while stocks rose.

The latest Commitments of Traders report was released, covering positions through Tuesday: The 3-Year Min/Max Screen shows mostly the same trends in "smart money" positioning as prior weeks. Large, commercial hedgers continue to accumulate multi-year or record short exposure against many commodity contracts such as soybeans, sugar, and natural gas. Their exposure against commodities in general and agriculture in particular continue to move to new extremes. They started to reverse their shorts in 10-year Treasury futures but have a long way to go before even hitting neutral. In stocks, there was essentially no movement as they held a net short position worth about $37 billion.

Bottom Line:

  • A positive environment favors becoming aggressive on signs of excessive pessimism.
  • Market environment (More info)
    PositivesNegatives
    1. Price pattern (barely)1. % of Stocks in Correction
    2. Moving averages
    3. McClellan Summation

    4. % Stocks > 200-Day
    5. Net New Highs / Lows
  • Sentiment / Breadth / Other
    PositivesNegatives
    1. Big up volume1. Confidence high (plateauing?)
    2. Surging small-caps2. Too much options speculation
    3. Surging tech stocks3. Equities high vs GDP, Assets
    4. Mar-May thrusts, recoveries4. IPO market too hot
    5. Excess liquidity is high
  • Other Sectors and Assets
    PositivesNegatives
    1. Energy (here, here, and here)1. Skewed tech (here and here)

    2. Dollar test

Smart / Dumb Money Confidence

Smart Money Confidence: 24% Dumb Money Confidence: 75%

Risk Levels

Stocks Short-Term

Stocks Medium-Term

Bonds

Crude Oil

Gold

Agriculture

Research

Most energy shares trade for less than $5 (even $2)

BOTTOM LINE
In March, almost all U.S. energy companies had a share price below $5. It hasn't changed much since then. A majority have share prices even below $2. This is beyond any other extreme over the past 20 years.

FORECAST / TIMEFRAME
XLE -- Up, Long-Term

Thanks to free commissions and an increasingly democratized investing landscape, more and more trading activity has occurred in low-priced stocks.

As the Wall Street Journal notes, earlier this summer the volume in stocks priced below $5 more than doubled:

"Trading in speculative stocks with low share prices has surged this year, fueled by a huge influx of individuals using zero-commission investing apps and online brokerages. During several months this spring and summer, more than 25% of the shares traded in the U.S. stock market were in companies with a share price below $5, according to data from the New York Stock Exchange. From 2012 to 2019, that percentage mostly hovered between 10% and 15%, the NYSE data show."

We can see just how extreme this volume jumped in 2020.

One sector that has seen this increased volume flow is energy. Not because investors are in love with it, quite the contrary. Rather, it's because stocks in the sector have fallen so much that many of them have become cheap by default. Cheap in price, not necessarily valuation.

According to data compiled by Portfolio123, out of 663 U.S. listed stocks in the energy sector, 470 of them have a share price under $5.

This is kind of insane. And it's down from a peak of nearly 80% of these companies in March. No other energy bust in the past 20+ years saw more than 65% of these firms with a share price under 5 bucks.

The only other times when there was a peak with more than 55% of energy companies below $5, the long-term returns in XLE were abnormally positive.

 It gets even more extreme. More than 390 of them have shares that you could buy with a 2 dollar bill.

Again, forward returns were heavily skewed to the positive after peaks above 50%.

This appears absurdly positive for long-term returns in many of these shares.

The biggest caveats are that the 2020 readings are so extreme that there's simply no real precedent over the available data history. And even though these shares became low-priced to an extreme degree in the summer of 2019, the sector continued to suffer tremendous selling pressure, unlike the last two times when it marked the ends of the bear markets.


Bond investors start to price in more risk

BOTTOM LINE
There has been a sudden and large increase in implied volatility in bond options. While this concerns some investors who worry about this bleeding into the stock market, historically a quick rise in bond volatility has not done so. There was a consistent pattern of the VIX dropping in the months ahead, while stocks rose.

FORECAST / TIMEFRAME
None

The world is awash in debt, it's only getting worse, and many investors seem to think that this is where the next great crisis will arise.

Within the bond market, it's been relatively smooth sailing. Volatility has been exceptionally low, and options traders were recently pricing in a record amount of calm.

But after the ICE BofA MOVE Index of bond implied volatility hit a record low on September 29, it has spiked more than 65%. That's a relatively large jump for this index in a relatively short amount of time.

If we go back over the past 30+ years and look for other times when there was a sudden spike in bond implied volatility from a 52-week low, then we can see that it typically did not result in even higher volatility going forward.

Across all time frames, the MOVE index declined most of the time. On a shorter-term basis, there was a strong tendency for lower volatility to get priced in, as well as over the next 3-6 months. Only once, in June 2007, did an initial drop in the MOVE index precede a large, sustained rise in the months ahead.

For bond prices, which move opposite to yields, it was a mixed sign.

Even though implied volatility tended to decline after these spikes, it didn't necessarily help bond prices to rise, at least not consistently. Over the next 2 months, there were only 2 gains and 4 losses.

These jumps in bond volatility almost never ended up bleeding over into implied volatility for stocks.

In some respects, when traders got nervous about renewed volatility in bonds, it ended up being even more negative for implied volatility in stocks. This is the exact opposite of the concern that's currently percolating.

These declines in the VIX were due in large part to a rising stock market.

While forward returns in the S&P 500 weren't dramatic, they were mostly positive. Either 1 or 2 months later, the S&P showed a gain every time. It's not like there was no risk, but it was relatively contained and was smaller than the reward.

Of course, this time is different from the others. It always is. And maybe the debt load will prove to be crushing, and this initial rise in bond volatility will give way to a total breakdown of the most important market in the world, ultimately freezing credit and crashing stocks. All we can say so far is that other times bond traders have suddenly woken up to the potential for increased volatility, it didn't lead to much.


Active Studies

Click here to view the Active Research on the site.
Time FrameBullishBearish
Short-Term00
Medium-Term48
Long-Term482

Indicators at Extremes

Click here to view on the site (% Extremes and "Excess" tabs on the dashboard).
% Showing Pessimism: 8%
Bullish for Stocks

VIX
Inverse ETF Volume
Rydex Beta Chase Index
VIX Term Structure
OEX Put/Call Ratio
Mutual Fund Flow (no ETFs)
% Showing Optimism: 38%
Bearish for Stocks

Smart Money / Dumb Money Confidence Spread
Intermediate Term Optimism Index (Optix)
Smart Money Confidence
Short-term Optimism Index (Optix)
Dumb Money Confidence
% Showing Excess Optimism
NYSE Arms Index
S&P 500 Down Pressure
Rydex Bearish Flow
Rydex Ratio
Rydex Money Market %
Equity Put/Call Ratio
NYSE Up Volume Ratio
NAAIM Exposure Index
Major Index Combo
AIM (Advisor and Investor Model)
Options Speculation Index
LOBO Put/Call Ratio
ROBO Put/Call Ratio
Equity Hedging Index
Retail Money Market Ratio
NYSE Available Cash
Mutual Fund Cash Level
Equity / Money Market Asset Ratio

Portfolio

PositionDescriptionWeight %Added / ReducedDate
Stocks15.6% RSP, 10.1% VWO, 7.5% XLE, 5.1% PSCE38.2Added 5%2020-10-15
Bonds10% BND, 10% SCHP, 10% ANGL29.7Reduced 0.1%2020-10-02
CommoditiesGCC2.4Reduced 2.1%
2020-09-04
Precious MetalsGDX4.7Added 5%2020-09-09
Special Situations0.0Reduced 5%2020-10-02
Cash25.0
Updates (Changes made today are underlined)

After the September swoon wrung some of the worst of the speculation out of stocks, there are some signs that it's returning, especially in the options market. It's helped to push Dumb Money Confidence above 70%.

A big difference between now and August is that in August, there was a multitude of days with exceptionally odd breadth readings. Some of the biggest stocks were masking underlying weakness. Combined with heavy speculative activity, it was a dangerous setup.

Now, we've seen very strong internal strength, in the broad market, as well as tech and small-cap stocks. Prior signals almost invariably led to higher prices. That's hard to square with the idea that forward returns tend to be subdued when Confidence is high, but that's less reliable during healthy market conditions, which we're seeing now (for the most part).

I added some risk with small-cap energy stocks, due to an increasing number of positive signs in both small-caps and energy. This is intended as a long-term position.


RETURN YTD:  0.0%

2019: 12.6%, 2018: 0.6%, 2017: 3.8%, 2016: 17.1%, 2015: 9.2%, 2014: 14.5%, 2013: 2.2%, 2012: 10.8%, 2011: 16.5%, 2010: 15.3%, 2009: 23.9%, 2008: 16.2%, 2007: 7.8%

Phase Table

Click here to view the Phase Table on the site.

Ranks

Click here to view on the site (Ranks tab on the Dashboard).

Sentiment Around The World

Click here to view on the site.

Optimism Index Thumbnails

Sector ETF's - 10-Day Moving Average
Country ETF's - 10-Day Moving Average
Bond ETF's - 10-Day Moving Average
Currency ETF's - 5-Day Moving Average
Commodity ETF's - 5-Day Moving Average

Sorry, you don't have access to this report

Upgrade your subscription plan to get access
Go to Dasboard
DATA &
TECHnologies
IndicatorEdge
‍
BackTestEdge
‍
Other Tools
‍
DataEdge API
RESEARCH
reports
Research Solution
‍
Reports Library
‍
actionable
Strategies
Trading Strategies
‍
Smart Stock Scanner
‍
FREE
RESOUrCES
Simple Backtest
Calculator
Simple Seasonality
Calculator
The Kelly Criterion
Calculator
Sentiment Geo Map
‍
Public Research Reports
‍
Free Webinar
COMPANY
‍
About
‍
Meet our Team
‍
In the News
‍
Testimonials
‍
Client Success Stories
Pricing
Bundle pricing
‍
Announcements
‍
FAQ
© 2024 Sundial Capital Research Inc. All rights reserved.
Setsail Marketing
TermsPrivacyAffiliate Program
Risk Disclosure: Futures and forex trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones’ financial security or life style. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results.

Hypothetical Performance Disclosure: Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown; in fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk of actual trading. for example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all which can adversely affect trading results.

Testimonial Disclosure: Testimonials appearing on this website may not be representative of other clients or customers and is not a guarantee of future performance or success.