Energy Sector Posting Impressive Year-End Rally

Bryan Perry

A former Wall Street financial advisor with three decades' experience, Bryan Perry focuses his efforts on high-yield income investing and quick-hitting options plays.

Merry Christmas!

As the 2017 stock market rally rolled along, it did so without the broad participation of the energy sector.

Heading into the month of December, it was pretty much thought that investors will book their expected losses in energy stocks to reduce taxes from the gains collected from the technology, financial, consumer discretion, industrial, health care and transportation sectors.

While the price of WTI crude made its way back up to $58/bbl. earlier this month, the energy sector still lagged under the notion that the coordinated production cuts by OPEC and non-OPEC oil-producing nations would at some point come to an end or endure widespread cheating, as has been the historical norm. The risk was that it would make the production cuts useless. But instead, oil-producing countries have complied, as far as known, and now the market is firming up as tax reform lifts the view for accelerated growth for the United States that also will benefit the global economy.

It is as if there is an epiphany by investors in the demand-side part of the supply/demand equation that a genuine rebalancing is possible without the intervention of production manipulation. And it’s not just tax reform that is triggering the rally in energy stocks, economic data around the world is showing global synchronization of growth, according to investment research firm CFRA.

“For the second quarter in a row, all 45 countries tracked by the Organization for Economic Cooperation and Development (OECD) showed year-over-year growth in gross domestic product growth (GDP) in the third quarter,” investment strategist Lindsey Bell wrote Thursday. “CFRA views such broadening of growth an important sign of world health and a positive for the international outlook.”

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This most recent proclamation of forecasted strong growth by the OECD has the investors feeling like another leg to the bull market is about to take hold, providing a fresh bid under not just the energy sector, but the commodities and materials sectors as well. Stocks of copper, steel, cement, fertilizer, wood and other deep cyclical commodities are seeing a rather sudden wave of new interest, something of a wake-up call even for value investors. While there have been two or three short-term commodity-related rallies this past year, they all petered out after a few days, making the current rally suspect as well.

However, the evidence of global economic reflation is widespread and not just regional. There is a growing case for taking this nascent rebound in the cyclical commodity sectors seriously and, for income investors, that would mean targeting some of the beaten-up energy master limited partnerships (MLPs) that have been bumping along the bottom of their 52-week ranges all year long. Most have been left behind as road kill this year amid steep losses, but now there is a pulse being felt among some of the stocks, of which some sport double-digit-percentage distribution yields.

Looking at the chart of the JPMorgan Alerian MLP ETN (AMJ) below that closely tracks the energy MLP space, there is a good technical case that a new uptrend is in the very early stages of being established. We’re seeing a high level of trading volume at this level where a reversal of trend looks to be shaping up. It’s still very early to call it a new bull trend, but this development bears close watching. If it is a turning point, then the opportunity for strong outperformance in 2018 is excellent.

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As 2018 gets under way, I’ll be covering this developing story closely and sifting out the best high-yield income strategies for income investors to move into. I encourage investors to go to my website at www.bryanperryinvesting.com to stay informed. My website is also where I’ll be recommending my subscribers allocate capital to what easily could be the best-performing sector for 2018.

In case you missed it, I encourage you to read my e-letter article from last week about why liquefied natural gas could be one of the hottest sectors in 2018.

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Hilary Kramer is an investment analyst and portfolio manager with 30 years of experience on Wall Street. The Financial Times describes Ms. Kramer as “A one-woman financial investment powerhouse” and The Economist distinguishes her as “one of the best-known investors in America”. Ms. Kramer is often quoted in publications such as the Wall Street JournalNew York Post, Bloomberg, and Reuters.

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