We continue our annual "12 Days of Christmas" series today with the next installment of "Themes to Know for 2017." Today, we focus on the improvement we have seen within the Energy and Industrial sectors.

We continue our annual "12 Days of Christmas" series today with the next installment of “Themes to Know for 2017."  As you recall, this year's "12 Days of Christmas" revolves around the topic of “Themes to Know” as we move into a new year. When we look at where the last 12 months has left us with respect to our indicators, key charts, and other relationships, there are several themes we feel are particularly noteworthy and are worth exploring in this year's series of features. In case you missed it, you can review the article for Day 1 using the link below:

Day 1: “Sector Themes: The Rise of the Financials Sector”

Day 2 - Sector Themes: The Rise of the Energy & Industrial Sectors

In addition to the rise of Financials, there are two additional sector themes to know about as we head into 2017 - Energy and Industrials. Much of the improvement in both of these sectors began at the mid-point of 2016 and ultimately culminated with their ascension to some of the top spots in the DALI Sector Tally Ranking. Today, Energy ranks in second place (out of 11) in DALI, while Industrials ranks fourth. In the graphic below, notice how Energy started off the year in last place with 22 signals yet it has now risen up to second place with a total of 196 signals. This places Energy below Technology, which is in first place with 205 signals, and Energy has continued to gain signals and inch closer to Technology since the beginning of December. The journey for Energy has been anything but smooth. It saw a surge of momentum through June and July but then stalled in August and September, as it lost around fifty signals. However, it remained quite resilient and began to pick up more signals heading into and after the Election, pushing it to where it ranks today. Industrials, on the other hand, was a middling sector at the beginning of the year, as it ranked in sixth place out of 11. In the middle of the year, it ranked 8th, but it then began to pick up strength. Notice how it steadily rose in the rankings in July, August, September, and then moved into the top four by November 1st, 2016, the place in which it still ranks today. Throughout the rest of the piece, we’ll look to present other positive technical developments that have occurred within both of these sectors as well as a shopping list of ideas.

Indicator Observations and Developments:

• Energy and Industrials became Favored on March 3rd and 4th, respectively, and they both have all four of the Sector Status attributes. 
• The Industrials fund group within the Asset Class Group Scores page crossed above the 3 score threshold on March 15th, 2016, and it has maintained a score above 3 ever since. Right now, Industrials is scoring 4.51, making it the fifth highest scoring sector fund group. The groups that rank above it are primarily Technology or Financials. The Transportation sector, which is a subgroup of Industrials, is ranked as the second highest sector group with a score of 4.72. 
• The DWA Energy Index DWAECENERGY completed a RS Buy Signal versus the S&P Equal Weighted Index SPXEWI on December 5th, 2016, moving the RS Chart back on a buy signal for the first time since early October 2014. 
• Both the Energy and Industrial groups have sub-sector representatives ranked high in the DWA Group Matrix. Aerospace DWAAERO, an Industrials-related sector, is currently ranked in fifth place on the DWA Group Matrix, while Oil DWAOIL, an Energy-related sector, ranks in sixth place. Other sectors from these two broad groups that are ranked high include Building DWABUIL and Oil Service DWAOILS, which are found in ninth and tenth place on the DWA Group Matrix. 
• Evidence of short term strength in these two groups can be found on their RS in X's charts. The ^RSXECINDUST and ^RSXECENERGY are at 60% and 66%, respectively. ^RSXECENERGY moved to a buy signal back in October 2016, while ^RSXECINDUST moved to a buy signal back in March 2016. 

Industrial:

The Industrial Broad sector's improvement in the DALI sector rankings and asset class group scores is impressive and suggests the potential for continued strength from this group as we move into 2017.  We have identified ideas in this sector and, not surprisingly, most are close to very overbought levels within their weekly distribution calculations, from which we typically watch for pullbacks from these overbought conditions.  As we searched for ideas within this broad sector we decided to create three lists. The first is a small list of ETFs investing in the Industrial sector.  These all have powerful scores and are more than 100% overbought. The second list contains stocks in the Industrial broad sector that meet the basic PnF criteria identified just above the list.  Many of these are also overbought with charts that need to pull back to create a better reward to risk ratios.  Finally, there were stocks whose default trend charts contained a long column of X's that didn’t allow for reasonable entry or exit points. For these we evaluated the charts with a smaller scale to create a more sensitive picture of the battle between supply and demand.  These scales are listed next to the symbol (3rd table below).  

While it is hard to buy stocks that are so overbought, strong sectors often stay strong and it is important to “get invested” at least to some degree if not already. One option is to look to ETFs to gain broad exposure to sectors without the risk of a single stock. You can then look for pullbacks in ETFs to add further to positions or look for pullbacks in individual stocks to round out your exposure to the sector.    

The shopping list for individual stocks in the broad Industrial sector was easy to generate through the query function.  We searched the Economic Industrial sector for those optionable stocks that have a minimum of 3 positive technical attributes including positive trend, Mkt RS in X's and Peer RS in X's.  Additionally, they needed to be on a buy signal.  The list below was also filtered to remove those that were extremely overbought and did not have an alternate scale that was helpful.  All of the names in the table below are on the overbought side of the distribution calculation, and for most it would be better to consider partial positions and then look to purchase the remainder on a pullback. An example of a nice pullback can been seen on the chart of Lockheed Martin LMT shown below. The second table contains the stocks which we used an smaller alternate scale for the evaluation. 

Industrial Stocks Shopping List
Symbol	Name	Price	Tech Attrib	Trend	Yield	Overbought (Wkly)
ACN	Accenture PLC	123.31	5	Positive	1.96	47%
ADP	Automatic Data Processing, Inc.	98.22	3	Positive	2.32	99%
BERY	Berry Plastics Group Inc.	50.49	5	Positive	0.00	84%
BGC	General Cable Corp	19.95	5	Positive	3.61	92%
CGNX	Cognex Corp	63.04	5	Positive	0.48	76%
CPRT	Copart Incorporated	55.35	4	Positive	0.00	26%
CRH	CRH plc (Ireland) ADR	34.12	3	Positive	3.31	19%
EXP	Eagle Materials, Inc.	102.07	5	Positive	0.39	97%
GLNG	Golar LNG Ltd	23.81	5	Positive	0.84	4%
GVA	Granite Construction Inc	60.40	5	Positive	0.86	69%
ITW	Illinois Tool Works Inc.	127.02	4	Positive	2.05	69%
JCI	Johnson Controls International PLC	43.73	4	Positive	2.29	27%
KN	Knowles Corp	17.05	3	Positive	0.00	54%
LMT	Lockheed Martin Corporation	259.53	5	Positive	2.81	34%
MTZ	Mastec Inc	39.90	5	Positive	0.00	93%
NOC	Northrop Grumman Systems Corporation	238.43	5	Positive	1.51	22%
OC	Owens Corning Inc.	56.03	4	Positive	1.43	53%
PAYX	Paychex, Inc.	60.16	4	Positive	3.06	68%
PKG	Packaging Corp of America	87.38	5	Positive	2.88	40%
TRN	Trinity Industries Inc	28.33	3	Positive	1.55	65%
USCR	US Concrete Inc	63.65	4	Positive	0.00	78%
WAIR	Wesco Aircraft Holdings	15.40	3	Positive	0.00	65%
WCN	Waste Connections, Inc.	79.11	4	Positive	0.91	49%
XYL	Xylem Inc	51.48	4	Positive	1.20	10%
ZBRA	Zebra Technologies Corp	83.27	4	Positive	0.00	97%

 

Industrial Stocks Evaluated with Alternate Scale
Symbol	Name	Price	Tech Attrib	Trend	Yield	Overbought (Wkly)
APH (.5pt)	Amphenol Corporation	68.51	5	Positive	0.93	37%
GWR(.5pt)	Genesee & Wyoming Inc	80.01	3	Positive	0.00	76%
IR(.5pt)	Ingersoll-Rand PLC	78.45	5	Positive	2.04	96%
LLL(1.0 5pt)	L-3 Communications Holdings, Inc.	158.45	3	Positive	1.77	48%
ODFL(.5pt)	Old Dominion Freight Line, Inc.	89.13	5	Positive	0.00	96%
R(.5pt)	Ryder System, Inc.	82.24	5	Positive	2.14	83%
RSG(.5pt)	Republic Services, Inc.	56.52	3	Positive	2.27	99%
SUM(.5pt)	Summit Materials Inc	24.31	3	Positive	0.00	67%
TPC(.5pt)	Tutor Perini Corporation	28.60	5	Positive	0.00	65%
XPO(.5pt)	XPO Logistics Inc	48.22	5	Positive	0.00	114%

Energy:

Similar to the Industrial ideas above, you will notice that a majority of the Energy ETFs, along with a number of stocks, are nearing or are in very overbought territory. Because of this, we would look for the charts of these securities to either normalize at current levels or pullback to actionable ranges. In terms of how to get exposure to these securities, similar approaches can be taken to gaining exposure to Energy and Industrial names. Whether consulting alternate scales, or simply just adding a partial position here and looking for potential pullbacks, the process in gaining exposure to these sectors is somewhat similar. Our stock query focused on optionable stocks with a last price greater than $10, average volume greater than 250,000 shares, at least a technical attribute rating of 3 or higher, on a buy signal, in a positive trend, and a reward to risk ratio north of 2 to 1. Please note that we did not include alternate scales for the Energy stocks, as few alternate scales for these stocks yield better support than the default chart. Alternate scales could be consulted for some of the ETF charts though, as many of these funds are overbought. We’ll highlight two of the more actionable Energy-related charts below.

Energy Stock Ideas
Symbol	Name	Price	Tech Attrib	Yield	Overbought/Oversold
AM	Antero Resources Midstream LLC	28.77	5	3.68	0%
APA	Apache Corporation	66.56	4	1.50	37%
APC	Anadarko Petroleum Corporation	70.47	4	0.28	65%
CLR	Continental Resources Inc.	54.32	5	0.00	17%
CNQ	Canadian Natural Resources Ltd.	33.38	5	3.00	23%
CPE	Callon Petroleum Co De	17.09	5	0.00	43%
CRC	California Resources Corp	19.13	5	0.00	68%
CRZO	Carrizo Oil & Gas, Inc.	40.28	5	0.00	13%
CXO	Concho Resources Inc.	142.36	5	0.00	25%
ENB	Enbridge Inc.	42.03	3	2.85	-17%
ENBL	Enable Midstream Partners Limited Partne	15.71	5	8.10	4%
ENLC	Enlink Midstream LLC	17.95	4	5.68	29%
FANG	Diamondback Energy Inc	106.04	4	0.00	29%
HLX	Helix Energy Solutions Group Inc	10.70	5	0.00	26%
LPI	Laredo Petroleum Inc.	14.34	5	0.00	12%
MUR	Murphy Oil Corp	32.98	3	3.03	42%
OKS	ONEOK Partners, L.P.	41.96	5	7.53	25%
PBR	Petroleo Brasileiro S.A. (Brazil) ADR	10.84	3	0.00	-1%
PXD	Pioneer Natural Resources	187.06	5	0.04	14%
REI	Ring Energy, Inc.	11.87	4	0.00	9%
REN	Resolute Energy Corp.	33.74	5	0.00	19%
RSPP	RSP Permian, Inc.	43.46	5	0.00	28%
SM	SM Energy Company	36.62	5	0.27	-6%
SPN	Superior Energy Services Inc.	18.06	3	0.00	21%
TRGP	Targa Resources Corp.	53.54	5	6.80	48%
WLB	Westmoreland Coal Company	18.73	5	0.00	91%
WPX	WPX Energy Inc	14.82	5	0.00	42%
XEC	Cimarex Energy Co.	141.59	5	0.23	36%

Two particular charts that caught our eye were Canadian Natural Resources Ltd. CNQ and the Vanguard Energy ETF VDE. CNQ is a 5 for 5’er that offers a decent entry point at current levels and is accompanied by a yield of almost 3%. Those considering CNQ here can look for a move to $27 as possible stop loss point. VDE on the other hand is like many Energy ETF charts in the fact that after Monday’s action, many of the charts are trading at or near the top of their 10-week trading bands (i.e. overbought territory). Unlike some other Energy ETF charts, a pullback on the chart of VDE to the $102 level would present a good opportunity to add exposure. VDE maintains a fund score of 4.71, which is stronger than the average score for an Energy-related fund at 3.58. From here, those who may add exposure to VDE on a pullback can look to a trend line violation at $96 as a possible stop loss point.