Energy, Ag's Surge Might Be Waning

Energy and agricultural issues have moved sharply higher since the January lows, outperforming other market groups by a wide margin. They continued to shine when the major indices pressed up to two-month highs ahead of last Friday's reversal and have held up well since, with several components posting new rally highs.

But can these leadership stocks buck the tide if the broad market heads back to the winter lows, or will gravity finally take over and kill the last strong stocks left standing in this wicked environment? Let's look at evidence on both sides of this critical argument.

Energy

Crude oil is trading over $100, and natural gas continues to grind higher in its strongest run in many years. This bullish backdrop provides support to the entire energy complex and should continue to do so through the summer. Nat gas is especially interesting because it is now sitting above $10, which has been a major barrier for the last eight years.

Natural Gas

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Source: eSignal

But it isn't a slam-dunk that energy stocks will move in lock step with their underlying commodities. Historical data predict that these issues will follow the futures markets in quiet times but track the equity indices in wild times. This occurs because macro forces affecting the broad stock universe can affect sector profitability despite a booming oil market.

With this two-sided relationship, I look for energy stocks to gravitate toward index leadership whenever the Market Volatility Index rises above 25. This indicator closed at 23.82 in Monday's session after ticking higher for the last two days. So it's nearing the critical level where equities might decouple with the futures markets.