May 3rd, 2008

Oil & Gas Stocks in IBD 100, plus VLO a Short?

Four Industry Groups comprise 55% of the IBD 100 list this past Friday; their representation was 28% at the beginning of February:

I’ve written about the Oil&Gas stocks among the IBD 100 since all the way back in 2005. As a matter of fact, on January 28, 2006 I wrote:

“When I compare the charts of individual Oil & Gas stocks and the “ranking” of those stocks as a percentage of the total IBD 100 list, I see an inverse , albeit imperfect, correlation. That is, the number of these stocks to hit the list seems to increase and peak about two-three months ahead of the prices of the stocks themselves beginning to plateau.”

It’s only logical since one of the components used by IBD to arrive at their rankings (for both individual stocks and Industry Groups) is price change relative to the market, RSI’s. Stocks and Industry Groups that have been out-performing the market, consequently, rise to the top. However, this is no indication that near-term future performance will continue to the same degree. I think what we might be seeing is an interim peak in the energy stock complex.

As a matter of fact, take a look at this previous Oil&Gas darling, VLO (Valero). If you were exclusively a chartist, you’d see a long-term (nearly 3 years) head-and-shoulder top formation and, on a break below 47, sell the stock short (perhaps buying puts is a safer strategy):

What makes this even more compelling (as a possible short) is the stock action of competitors in this group like SUN, ALJ, DK and TSO. They’re down huge. Although down about 33% since the peak early in 2007, VLO may have another leg down to the low 30’s.

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