Energy is Crashing. Who Wins, Who Loses?

Something I have been enjoying the heck out of recently has been watching the crash in Crude Oil and the stocks that represent the Energy sector. I have enjoyed it because I have ZERO exposure to Oil in my portfolios and haven't since mid Summer. This is what Relative Strength investing does; it keeps you positioned toward the strength in the market and away from the weakness. Relative Strength and trend analysis signaled problems with Energy names several months ago and have avoided most of the recent declines. Let's take a look at a couple Energy stocks to see how this has played out.

Halliburton

The stock of Halliburton, one of the world's largest oil service companies, has crashed nearly 50% from its highs just 5-months ago.

Looking at the Relative Strength trend for this timeframe shows two distinct exit points where the flow of funds was shifting negatively:

Once the stock failed its 20 WMA, RS had already broken its steep uptrend support and was signalling that the the trend was failing. That was your first signal to sell; worst case scenario was for that sell signal combination was an exit at the $62 weekly close.

If you had taken a longer-term view you may have been willing to give it more room to prove the uptrend wrong. By waiting for the longer-term (blue) uptrend line to fail would have signalled an exit in the ~$50 area. Either way you slice it, following this simple trend recognition signal could have saved you much of the pain from this meltdown.

EOG

EOG is one that I have personally been heavily involved in since early 2013. Above are my actual exit points for my personal accounts. The first exit was for my very aggressive short-term accounts and the second was the full trend invalidation for the Weekly timeframe I use for managing private investment accounts.

In hindsight the first exit was clearly amazing, although at the time I didn't know if it was going to be just a pause in the uptrend or a full trend reversal signal. This is what a very aggressive trend strategy will get you, but it will also often just be a pause that then resumes higher and makes it difficult to get back in once you sell.

The second exit was about as clear as a long-term trend invalidation gets. Price had consolidated at the 20 WMA, but then broke those support lows, the 20 WMA and the 2-year uptrend support trendline. Using RS as a confirming indicator we can see that it too suggested a change in trend at that same time:

Remember when I said to be patient and not go rushing into Conocophillips (COP) and that the key support would need to hold?

Here is what happened...

This is a great example of what tends to happen when a stock rises rapidly and unsustainably steep. All big trends eventually end badly, COP has found some support around the $64 area but will need to hold that NOW to fend off another steep drop lower.

ALL OF THESE ENERGY STOCKS ARE IN "NO TOUCH" MODE.

We don't try to pick tops and bottoms with a trend method, in my view none of these stocks are showing signs of a sustainable bottom being set. There will likely be sharp rallies that convince many that the lows are in, but that is a sucker's game. We will need to see significant firming price action before our signals begin to trigger new entries into these names.

I think now is a great time to make a list of your favorite Energy names and be ready for when the trend shifts back upward. You want to know exactly what you will buy BEFORE the trend changes higher. That way you will not be second guessing yourself and just emotionally buying whatever the pundits on TV say to buy.

Large declines present opportunity...eventually. The trouble is most people try to front-run the actual bottom by continually taking shots a catching the lows. It is a much higher probability to wait for the trend of lower highs and lower lows to end before even attempting a new entry.

So watch Energy for new opportunities in the coming year as all trends, both up and down, will eventually reverse course. You will want to be on the right side of these stocks when the trend turns for the better.

So Who Wins?

So if Oil is tanking and Energy stocks are following, who is set to benefit by these lower prices?
Anything Consumer focused should do well, as well as anything involving Transportation, i.e. Shippers and Travel.

Lower Oil prices mean lower gas prices, lower gas prices mean more discretionary income for consumers to spend and lower costs of fuel for vehicle operation.

A couple of my favorite picks that are already benefiting from these lower prices are:

Starbucks (SBUX)
Carnival Corp (CCL)
United Parcel Service (UPS)

Each of these benefit from from lower gas prices and higher discretionary income from consumers. Their price charts reflect this shift:

SBUX

CCL

UPS

Each of these stocks hit higher highs this week, in the case of SBUX and UPS those highs were new all-time highs. These names and many others like them will continue to benefit from reduced oil prices. The nice thing about these names as well is that the price of oil doesn't even have to continue tanking for them to see benefit. The longer oil stays below about $80 these companies will see increased traffic and lowered costs which equal increases in earnings per share (EPS). As earnings rise, stock prices rise. Lower costs and higher sales are a pairing made for record stock prices.

The beauty of these setups are that the decline in oil has been so rapid that we have not even seen the effects reflected in the quarterly reports yet. These reduced costs should fuel EPS for several quarters before their true values are understood. Continue to go toward the strength in the market.