Energy Has Yet to Show 'Sustainable' Recovery Pattern, Says Analyst

 | Apr 06, 2016 | 3:15 PM EDT
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What does a technician make of the turbulent start to 2016? While the broader market is on an upswing from February lows, it is still important for investors to pick their spots. Energy may not be one of those spots just yet.

"We aren't yet preparing to race in until there is more structural technical evidence of a true reversal, which can take weeks, up to several months. Stock selection remains key." Louise Yamada of Louise Yamada Technical Research Advisors said in a report released this week.

Real Money caught up with Yamada on Monday to get her assessment of the broader market and also energy stocks. Prior to launching her own firm, Yamada had a 25-year career at Smith Barney (now Citigroup) where she served as managing director and head of technical research. Yamada is also the recipient Market Technicians Association's annual award.

The recent market rally, due in part to recent accommodation from the Fed, could extend in the second quarter. Even so, Yamada wrote that investors should still remain cautious as "bear rallies can be deceptive and can average 20% gains."

What is interesting about this rally is that energy and materials, two of the more depressed sectors, were the initial recipients of the rally. However, Yamada wrote that some of the recovery could be due partly to short covering.

Also interesting to Yamada is the relative outperformance of industrials, which have been moving alongside so-called defensive issues such as utilities, telecom and consumer staples.

"The industrials doing well would suggest that the economy is getting better," Yamada told Real Money. "If you're going to start moving into the industrials, you would expect the defensive areas to start to fade. They haven't yet. They may be stalling."

With respect to energy, Yamada acknowledged that even though West Texas Intermediate crude oil rallied over the last month, there is not much evidence that there is a sustained reversal in price. Even if the lows have been reached, she said there is a need for an "extensive repair process" in light of the 77% drop in the commodity.

"Given the fact that energy and materials led this rally, we don't think that they necessarily are going to continue to recover," Yamada said. "They haven't really recovered a sustainable pattern of relative outperformance."

As an example of unsustainable trading patterns, look at the year-to-date movements in many of the energy stocks in Real Money's Stressed Out index. Double-digit swings in both directions have been the norm for companies such as Chesapeake Energy (CHK), Ultra Petroleum (UPL), Southwestern Energy (SWN) and Encana (ECA) this year -- especially in February.

"Given the incredible depression of the stocks in those areas, I think you've got to have a lot more time for repair," Yamada said that energy stocks may be better positioned as trading vehicles for now. "One would anticipate that those prices have to come back down or at least go sideways and establish something more of a basic process before they become sustainable leaders."

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