Oil & Gas

Our Factor Profile tool is currently flagging the Oil & Gas sector in both our equity and macro models as exhibiting "Overbought" conditions. While interesting by itself, there are also implications for other factors that are important to understand and follow. Let's dig in:

Oil, Gas, & Consumables

• In the US market, the Oil, Gas, & Consumable Fuels sector factor has seen a strong rally, up +5.77% YTD on a cumulative basis after bottoming out at -10.08% on March 8th.
• On a normalized basis, we can see that the March trough was -1.94standard deviations below the mean.
• There does appear to be a reversion trend occurring since normalized return hit a peak of +2.99 SD above the mean on May 2nd, compared to +2.62 SD above the mean on May 10th.

Oil Factor

The Oil commodity factor in our US Macro model has also enjoyed a strong rally in that same time frame, currently up 14.78% on a cumulative basis after bottoming out at -3.21% on Feb 13. On a normalized basis, Oil is now +1.43 SD above the mean.

As we know, sustained higher energy prices trickle into the fundamentals of the companies. YTD, the XLE (Energy SPDR) has seen a +29.77% increase in its overall Growth factor exposure score (-1.31 → -0.92), where Growth factor is defined as a blend of sales growth, estimated sales growth, earnings growth, and estimated earnings.

Readthroughs

A question we always ask ourselves is "What can the model tell us about implications for other factors?" Currently, the Oil & Gas sector is most correlated with the Value factor (35%) and is most anti-correlated with Earnings Yield(-44%). Thus, a near-term pullback in this sector factor could imply a corresponding pullback in Value and a rally in Earnings Yield.

We'll continue to monitor the Oil & Gas trend as well as these related factors. If you'd like to see the impact of any of these on your portfolio's performance and risk profile, or would like to better understand how we measure the relationships between factors, please don't hesitate to reach out.

Regards,
Omer