Characteristics of Capital Preservation: A Look at the US Energy Sector

In a market experiencing the largest pullback since the election, investors are rightly looking for places to hide. At present, according to our work, the US energy sector is the only truly oversold sector. In our technical work, when a group reaches less than 20% above a moving average, the terribly negative breadth signals an oversold condition. In the chart below, one can identify intermediate (2010, 2011, 2012…2017?) and major lows in oil prices (2009…2016?) associated with less than 20% of stocks above the moving average. We’re there now, signaling at least an intermediate low in oil prices.

Note to readers: For our indexes, we use the constituents of the Knowledge Leaders Selection Universe (KLSU), which captures the top 85% of the North American energy sector, is market-cap weighted and is rebalanced every March and September. The KLSU indexes are the selection universes for our Knowledge Leaders Indexes.

We can also look at the percent of stocks outperforming the MSCI World Index. In North America the percent of stocks in the energy sector that outperformed the MSCI World Index over the last 100 days is only 13%. This is a level associated with past major lows in energy shares, similar to 2008 and 2015.

Over the last two years, the components of KLSU Energy Index cut their aggregate capital spending by roughly $100 billion. This 33% drop dwarfs any retrenchment in energy capital spending that occurred in the last two recessions. After the 2008 recession, North American energy capital spending barely dropped 10%.