Whenever the price of oil or energy stocks have a large move, we like to compare how the two are trading in relation to each other. We do this by taking the ratio of the price of the S&P 500 energy sector and the price of oil (the commodity). Below we plot the long term relationship between the two.
Currently the ratio stands at 7.7, which is 10% above the long term average. Investors who think the ratio will revert to the mean would be betting that energy stocks are going underperform the commodity. Those who think the ratio will keep expanding, like it did in 1998 and 2002, would be betting that energy stocks will outperform the commodity. Although we would note that in both of those periods, energy stocks were falling even though they outperformed the commodity.
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