This chart compares XLE’s price history over the past 12 years to two metrics: 1) how many outstanding shares and 2) how uch investor buying takes place in XLE.
The red line represents outstanding shares. In 2020, the price rose from $30 to $90. Logarithmic charts show relative percentage changes. A large price increase that is accompanied by a significant rise in SO could be an indication of a contrary opinion. It can also indicate too much investor agreement.
The blue line, which shows how many XLE assets are purchased each day, confirms this. As you can see, this metric rises at the beginning or end of a price increase. We are cautious due to the low level of buying after the June price fall.
The End of the Oil Price Rise
The red zone indicates extreme bullishness and the green zone extreme bearishness. This indicator is contrarian. This indicator measures investor sentiment regarding oil. The correlation between oil prices and oil stocks can be very close.
Investors are able to easily connect extremes of investor sentiment with tops and bottoms of XLE. This can be seen in the investor bearishness deep below the oil market’s bottom just before the 2020 pandemic.
It’s also easy to spot red areas. Current readings for investor buying of SCO stand at 6.0. Although the index isn’t yet in the red zone we are still concerned that it didn’t drop below neutral during the recent oil price fall. We think oil will not go higher and place an upward limit on XLE.
Our sentiment scale or ranking
Investor sentiment ranges between -10 and +10. A Minus 10 represents extreme bearish sentiment; a plus 10 indicates bullish sentiment.
This is determined by the indicators past history. We look back as far as possible to determine the range with the highest percentage value. Next, we looked back as far as possible to find the range with the highest percentage at 5%. This was done in increments of 5 to reach the final 5% band. This is the lowest value. These “ranges” of values are marked with a plus 10 to minus 10
The MSI Red and Green Zones
As you can see, it oscillates between 10 and 10. The white border in the middle signifies periods with no extreme opinions. When it crosses the red line, the indicator is considered to be in the “extremely bullish” zone. The lower green area indicates the “extremely bearish range”. The demarcation line is not abrupt, but there are graduated areas with more or less degrees.
The Scale advantage
This allows us all to place the indicators on the same 21 level scale. It is possible to combine different indicators into one indicator or compare them. This is what we do with our master sentiment indicator (MSI), that we update every month.
An area of XLE trading
This graph illustrates what we believe is the likely trading range for XLE Signals over the next year. This graph was based on the belief oil stocks and XLE Signals are too expensive and should be digested. The presented facts support this belief.