Tech for Show, Energy for Dough

The leader of the market happens to be the same group that outperformed all year.
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A determined search party of intrepid market strategists has been trying to figure out which is going to be the new market leader going forward. Tech shares? Financials? Materials?

The market, however, seems to have already determined which sector would come to rescue the fledging bounce off the five-month lows hit in late October. The market has chosen the uncontestable market leader of the past year: That's right, the energy sector.

Even though crude oil has grinded lower and is now lingering below $60 per barrel, energy shares have been rumbling along since last week, when the sector's heavyweights posted earnings.

The Amex Oil Index, after closing at a three-month low of 912.68 on Oct. 20, has since rebounded an impressive 10.2%. On Wednesday, it closed up 17.22 points, or 1.74% at 1005.85, even as the price of crude oil fell another 35 cents to $59.50 per barrel on Nymex. The Philadelphia Stock Exchange Oil Service Index is up 14% since its Oct. 20 low of 153.45; on Wednesday, it rose 2.75% to 175.05.

By comparison, the

S&P 500

has risen a paltry 3.2% since its Oct. 13 low of 1176. And the gains for the broad average have accelerated since last week as energy stocks started rebounding in earnest.

On Wednesday, the S&P gained 12 points, or 1%, to 1214.76, largely supported by strong energy shares. The

Dow Jones Industrial Average

advanced 65.96 points, or 0.63%, to 10472.73.

Exxon Mobil

(XOM) - Get Report

, which rose 1.74%, was among the biggest gainers, after

Intel

(INTC) - Get Report

. The

Nasdaq Composite

rose 30.26 points, or 1.43%, to 2144.31 and is now up 5.25% from its Oct. 12 low of 2037.

Ironically, crude oil falling below $60 -- thereby easing inflation concerns and helping sentiment -- has been cited as a key catalyst leading stock prices higher since the October lows. True, tech shares advanced smartly, but the advance of energy shares was still more powerful.

So what explains the energy revival?

Following Hurricane Katrina and Rita's hit to Gulf Coast operations, the market had been discounting worsening results for many energy companies ahead of their third-quarter earnings. Many of the big integrated oils, such as Exxon Mobil and

Chevron

(CVX) - Get Report

, did suffer an impact from lost production, but no one really feels sorry for big oil.

And embarrassed by the fat profits they've been making all year even as

General Motors

(GM) - Get Report

is struggling to stay out of bankruptcy, some energy firms, it seems, did little to contradict those lowered expectations.

Even after Exxon Mobil's results fell short of expectations, "we believe that this reflected at least partly the company's reluctance to pass on higher prices to the consumers in order to diffuse any potential political backlash," writes Paul Cheng, oil sector analyst at Lehman Brothers.

But the market and analysts have seen through the ploy. Over the past month, the energy sector has had the strongest earnings estimate revisions of any sector for the full year of 2005, according to Zacks Investment Research. The average energy sector firm saw its mean earnings estimate rise by almost 6% over the past four weeks.

The gains were led by the oil refiners, such as

Valero

(VLO) - Get Report

and

Sunoco

(SUN) - Get Report

, which are benefiting from a capacity crunch and lower crude oil prices, notes Dirk Van Dijk, director of research at Zacks. "However, the gains were extremely widespread, with 26 of the 29

S&P 500 firms in the sector posting gains," he writes.

The tech sector had its mean 2005 estimates revised 2.8% higher. But this was mostly due to large revisions at

JDSU

(JDSU)

and

Sun Microsystems

(SUNW) - Get Report

.

Still, that's a lot better than for the whole universe of stocks on the S&P 500. Over the past month, while the mean estimate for 2005 earnings has risen for 192 firms, it has fallen for 227 companies. That puts the ratio of rising/falling estimates at 0.85, down from 1.49 where it stood just a week ago.

The two main culprits were the health-care sector, though this was mostly due to two companies

Tenet Healthcare

(THC) - Get Report

and

MedImmune

(MEDI)

, and both consumer staple and consumer discretionary stocks.

"A dollar spent to fill the tank, or pay the heating bill, cannot be spent on other things," notes Zacks' Van Dijk.

But as long as surging energy costs don't break the economy's back, a dollar put into energy shares can still apparently provide a bang for the major averages.

Still, even if energy stocks are again taking the lead in the market, it might be better to keep this to yourself and downplay expectations. As Exxon has learned, the noise may well reach congressional ears.

In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;

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