Energy sector on cusp of becoming golden

Earlier this fall, we saw that the energy sector had become the most-hated of all time and firms were cutting workers and dividends, before there were finally some signs of an uptick.

Many of these stocks staged a furious rally then spent recent weeks digesting those gains. Even so, it's been enough of a change in trend that the S&P 500 Energy Sector's 50-day moving average is oh-so-close to crossing above the 200-day average. It would be the first time in more than 2 years.

When this finally does cross, it will end the 2nd-longest streak of being in a downtrend since 1926.

When we look at long-term returns after the ends of such long streaks, there were further gains every time during the next 1-2 years. It was volatile, but the sector enjoyed an average gain of more than 42% at its best point during the next 2 years.

If we look at the ends of less protracted downtrends, then returns were still quite good. These are looking at shorter time frames.

Most of the losses occurred in the 1930s, so if we cheat a bit and start at 1940, then returns improved significantly, with no losses over the next 6 months and including an impressive risk/reward ratio. Over the next year, the sector averaged a nearly 28% gain at its best point, versus not even -3% downside at its worst point.

If we relax the parameters even more, with the first moving average cross in 6 months or more, then we can still see a positive bias (since 1940).

It's hard to buy an asset that's hated, especially to a historic degree. There's no telling when conditions are going to morph from horrible to less-horrible. The news flow won't help, because it's almost always the worst at the point of maximum pessimism, and there is great skepticism when the asset finally shows signs of life. We're seeing that now in energy, as well.

The conditions were ripe for a turn this fall, and now some trend measures are starting to suggest that perhaps it's sustainable. This should allow more trend-followers to hop on board and those who missed the initial surge to finally see their opportunity.