Volatility Ticked Higher as the Energy Sector Continues to Struggle

The S&P 500 was under pressure the week of August 3 as crude oil continues to struggle to find a bottom, impacting the energy sector. Mike Khouw and Jill Malandrino of Action Alerts OPTIONS review market action in a week that saw more volatility with multiple sessions of weakness. The energy patch saw lower lows on the charts each consecutive day and Khouw and Malandrino believe the sector will remain under pressure as it's simply a function of oversupply and nearly not enough demand. If sanctions on Iran are lifted, the Iranian oil mister has said that with in one week's time the country can produce an additional 500,000 barrels per day, and a million in one month's time. This is on top of a 2 million daily surplus we are currently contending with. When you have more supply coming into the system and not enough demand to take it out, energy-related stocks will underperform. Recall Exxon Mobil (XOM) is the third largest constituent of the S&P 500. According to S&P Capital IQ, the energy sector is expected to show -55.76% growth rate for the second quarter, whereas the S&P 500 is showing an aggregated growth rate 0.40% growth rate. Excluding the energy drag, S&P 500 EPS growth would be 7.9% in Q2. Longer-term, the sector could see improvement when there is massive industry consolidation to take producers out of the system. Regarding earnings season, reports have been OK, but the sentiment shifted when Disney (DIS) reported a beat on the quarter. ESPN subscriber guidance, however, threw the market for a loop because the secular trends analysts are concerned about, like household expense cutting, could now be impacting the media companies. DIS has arguably the best, must-see media property, which is ESPN, and the company is not forecasting as much growth in that vertical.