Thursday, December 6, 2012

This morning’s Wall Street Journal says a government study recommends the United States begin exporting some of our newly found abundant natural gas.  Quant doesn't read newspapers but coincidentally ranked the SPDR S&P Oil & Gas Exploration & Production Fund (XOP) in 5th place this morning, its highest rank since early October.  Since that prior high ranking, it has performed mostly in line with the S&P 500 but maybe that was just a false start and this is the time that it will begin to truly outperform. It is poised for a pop in that all three of its sentiment measures are scoring above 90.  Eventually all those puts and shorts will have to be covered and Quant thinks that will be sooner rather than later.  That’s confirmed by its 90.5 Volatility Score which suggests the selloff it has seen since mid September has indeed run its course for now.  Those Sentiment Scores account for half of the overall Behavioral Score which combines them with the Technical Scores which are OK but not great at 60s across the three sub categories.  On those the short term is better than the intermediate term which is better than the long term.  We can use our ETFG Scanner and adjust the filter to display its fundamentals and compare them to the market and other sector funds.  Here we see a P/E less than 11, a Price/Book Value of 1.37 and a Price/Cash Flow of 3.68, all cheaper ratios than the market and broad energy sector ETFs.  Only its yield of 0.90% compares unfavorably but that shouldn't be surprising as these companies are busy plowing all available capital into drilling projects.  Despite those cheap valuation metrics, they have been cheaper historically which keeps XOP’s overall Fundamental Score at 64.4 today.  There is palpable fear that the companies comprising this fund are sowing their own destruction by producing more energy than the market can consume.  Natural gas and oil prices have recovered from their summer lows but many of these companies have stretched their balance sheets so far that the recovery in prices may not be enough.  Having new markets open for their products should help but we all know government studies often do not get past the front page fanfare of their announcement day.  However, Quant suggests the fanfare today may be enough to shake out those shorts and fire up this fund for the next few months.

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