Socrates once said, “The unexamined life is not worth living.”

In that regard, we believe that it is good to keep a journal of the ideas, thoughts, and feelings one has over time to reflect upon down the road. We try to keep even our scratch pads for a period of time just to refresh our memory. The results of our habit of doing so can be instructive on how our perception evolves over time, where we were right, and where we were wrong in our thinking. This goes beyond a trading journal. It goes to when we should have pressed an edge or when we should have cut our losses.

As we sit here writing this blog in mid-October, we reflect on what we had written in August and September. Back on August 12, we wrote in this blog about a bullish divergence between the Energy Sector (XLE) and WTI crude oil.

As we wrote then:

“The Energy Service Sector as measured by the S&P 500 (XLE) spyder has declined from $50.1 to $48.68 or -2.8% during the past 3 weeks. On the surface, one would surmise that it is a somewhat inconsequential decline considering the decline in oil itself, but beneath the surface, there is more to the story. Many of the stocks that are highly levered to the price of oil and gas in the energy sector had been in a decline for a few weeks ahead of the decline in the price of oil. Some of those stocks have held up quite nicely since our July 15 blog entry and on a relative strength basis have outperformed the commodity. So although the narrowing term structure in the forward oil prices argues for continued short-term weakness in WTI crude oil, the stocks that are levered to the price of oil have begun to stabilize. And now we see what appears to be the beginnings of a bullish divergence. Should the pandemic news start to abate the energy sector may begin to outperform the rest of the market once again.”

Ah, if only we had the courage of our convictions and been more focused on this observation. Although WTI and the Energy Sector (XLE) continued to sell off for 6 more sessions finding lows around August 20th, as all can clearly see with 20/20 hindsight WTI crude oil and the Energy Service sector ETF (XLE) have smartly outperformed as COVID-19 news improved.

We generally write this blog on the Monday/Tuesday before Thursday publication. The ETF on August 10 closed near 49, by publication on the 12th it was 50.01 at the close. It fell finding a low close on the 20th of 45.89. Since then, XLE has moved higher to 57.89 as of this writing, a return of 15% in 2 months’ time and a far better return if one held off and could catch the low. WTI crude oil (front month) on August 10 closed at 68.50, on the day of publication it was at 68.91 for the close. It too found a closing low of 61.86 on August 20 and today October 19 is trading at 82.43, a 19% return from the publication. Individual names have done far better, especially those involved primarily in the natural gas space.

So where do we stand now? It appears that the bullishness has returned in a big way. As an astute friend pointed out recently: “The Bullish Percent Index for the S&P energy stocks remains at 100%.  The % of S&P energy stocks above their 50 day moving average is also at 100%.  It doesn’t get any better than this.” So we keep an eye on the commodity and the sector ETF, trim long positions that are extended and keep stops under the rest.

And as Arthur Cashin would say “Stay wary, stay nimble, and stay safe.”

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