A Closer Look at the S&P/TSX Energy Sub-Index

Yes, we have model price charts of each of the sub-groups making up both the S&P 500 and the S&P/TSX Composite Indices.

 

So let’s have a look at our super-long term model price chart of the S&P/TSX Energy Sub-Group.

 

S&P/TSX Energy Index with monthly price bars and EBV Lines (colored lines).

S&P/TSX Energy Index with monthly price bars and EBV Lines (colored lines).

 

Observables

 

  1. Looking at 19 years of history gives observers a sense of the valuation distribution of the Canadian energy sector. Back in 2005 to 2007 ‘oil patch’ equity valuations, as an index, reached a high of EBV+5. On the low side, except for a brief period in 2008 and 2009, EBV+2 seems to be the valuation lows achieved in 1999, 2011 and recently at the end of 2013.

 

  1. In general this Energy Sub-Group, as an index, seems to follow EBV+3 most of the time. Yes, when crude pricing and probably M&A activity are favorable valuations stretch over EBV+3. However when a secular bear market hits the sector this sub-group spends considerable amounts of time under our ‘Red Line’ or EBV+3.

 

  1. After the market decline and worldwide slowdown in 2000, and starting in late 2002 this Energy Index started in the valuation zone of EBV+2 and EBV+3 (the same valuation level as today – see ‘up’ arrow on chart) and rallied all the way up to EBV+5.

 

A Closer Look

 

Here are our short-term or weekly price bars of the S&P/TSX Energy Index model price chart.

 

S&P/TSX Energy Index with weekly price bars and EBV Lines (colored lines).

S&P/TSX Energy Index with weekly price bars and EBV Lines (colored lines).

 

  1. As you can observe this energy sub-index used our calculated EBV+2 as support for the month of December 2013 and into 2014. Again as you can observe since mid-February this index ‘ lifted off ‘ from EBV+2 for a nice gain.

 

  1. From April 21st, 2014 this energy sub-index has 22% upside potential to EBV+3 or Red Line.

 

  1. For fun, today’s current value of EBV+5 is 6043. Yes, that’s a full 82% above current levels.

 

Conclusion

The energy sector in Canada has been on a tear since mid-February. Large capitalized oil stocks like Suncor, CDN Natural Recourses, and EnCana have been moving upwards after many years in the doldrums. Just like 2002, the worldwide economy was recovering from an economic setback delivered by the equity – technology – crash in 2000. The circumstances in terms of worldwide growth for 2002 and today are quite similar and one could reasonably argue that the economic contraction of 2008 was certainly deeper than any economic recession experienced since the Great Depression. As global growth accelerates so does the worldwide demand for hydrocarbons.

 

Yes, Canadian energy stocks are starting to move upwards since mid-February. But if worldwide global growth starts to accelerate, this sector and sub-index do have a long way to run if this current period is any way analogous to 2002 to 2007.

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