Energy Sector Revs Up for 2008

We want to highlight the sectors that remain bullish and on the offensive as we head into the first quarter of 2008. The energy sector is a good place to start, since most of the non-defensive groups that continue to push ahead are related in one way or another to energy. The group is definitely back on the offensive, as crude oil recovers off of the pullback lows set in November.

The energy theme and related sectors and sub-sectors, such as solar, have been at the center of the remaining strength in this market. We believe the energy sector will continue to show strong comparative relative strength vs. the broader market going into 2008. Energy-related names should be a core holding of most traders' long-side portfolios.

Crude Oil Futures

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Crude oil has hooked upward recently and is acting fairly strongly after the breakdown from the $100 level in early November. Crude looks like it is ready to take another run at $100 after a string of bullish inventory reports have seen overall inventory levels at historically low levels.

What is catching our attention is the fact that $90+ oil doesn't seem to have weakened demand domestically, never mind internationally. We simply haven't seen the consumer cut back on energy usage, despite the historically high prices, and consumption has actually risen slightly.

If we consider this in conjunction with the continued surge in global economic growth and the rise in energy consumption around the world, then the outlook for energy prices should remain bullish. If crude can push back over $100, traders may start to believe in the idea of a real energy shortage, which could act as a catalyst to drive the energy stocks higher in 2008.

The strongest upside in the sector should be found in the exploration and production companies. Companies with oil in the ground should do very well with $100-plus oil prices, and traders will start getting excited about the possibility of a run on the commodity. The energy service sector has been weaker than the E&P names recently, but this group is turning up from a bullish consolidation and could have a good run in the coming weeks.

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At the time of publication, John Hughes and Scott Maragioglio had no positions in the stocks mentioned. Hughes and Maragioglio co-founded Epiphany Equity Research, which has developed and utilizes proprietary tools to identify and track liquidity changes in the market indices and sectors. Hughes advises numerous asset managers, hedge funds and institutions managing in excess of $30 billion. Maragioglio is a member of the market technicians association (MTA) as well as The American Association of Professional Technical Analysts (AAPTA) and holds a Chartered Market Technician (CMT) designation. Maragioglio has also served on the board of directors of the AAPTA.