Is Energy Sector Running Out of Steam?

I have talked about the business cycle and how it relates to sector rotations in the economy before. When the market is in topping process, energy, materials and the small-tool sector are normally the leaders. They normally stay in a leadership position until the economy begins to slow, and then money will begin to flow into utilities, health care and consumer staples. When that happens, you will see the basic materials start to correct followed by the energy. Today, as we look at those sectors, it appears that that process may be taking place.

After the market closed early on Thursday, CNBC ran a special on oil, as the price continued to break to new highs, reaching almost $146 per barrel. Of course, they paraded around analysts and commentators who talked about how positive they were on the stocks and the sector.

Fundamentally, we still have a major problem with the supply/demand situation, along with decreasing refining capabilities. Then you have the threat of more conflict in the Middle East, which could quickly accelerate the price of oil if there is an attack. This situation is prompting some astronomical estimates on oil prices.

Oil and other commodities have been the place to be during a recent correction in the market, and that narrow leadership has attracted a lot of momentum money that continues to pour into those sectors. However, last Wednesday saw a definite change in character in many of the commodity stocks, such as coal, steel, chemicals and agricultural names. The oil-related names escaped unscathed, but that may also be changing.

I mentioned a few weeks ago that I was seeing weakness in the farm and construction machinery sector which had been very strong or the past six years. That weakness now looks to certainly be overflowing into the other commodity areas.

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At time of publication, Manning had no positions in the stocks mentioned, although holdings can change at any time.

Mark Manning, AAMS, is an Accredited Asset Management Specialist and Registered Investment Advisor with Butler, Wick & Co., where he specializes in wealth management. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Manning appreciates your feedback; click here to send him an email.