Although I am not much of a technical trader, I do spend a lot of time looking for patterns and correlations in data. The correlations I look for are those that have historically provided buy or sell signals for a sector, or a stock.

This year there have been two historically reliable buy signals that could have made readers a lot of money. Both have been covered in these columns previously, and I have highlighted them in several presentations I have given this year. (See These Signals Delivered Loud ‘16 Gains).

This first is that whenever natural gas prices drop below $2.50 per million BTU, the price doubles within a couple of years. At least that’s what happened the previous three times prices dropped to that level. It’s one of those patterns that can be readily explained in terms of industry fundamentals, and therefore I consider it a pretty good buy indicator.

Not coincidentally, we recently recommended the VelocityShares 3x Long Natural Gas ETN (NYSE: UGAZ) to subscribers, which turned a profit of more than 30% in two weeks.

Another buy signal over the past 20 years has been a yield above 10% on the Alerian MLP Index — which is heavily weighted toward the midstream master limited partnerships. The two previous times in the past 20 years that the yield has gone that high — in December 1999 and again in December 2008 —  were followed by index gains of  46% and 76% respectively over the next 12 months.

The AMZ yield once again topped 10% in mid-January and mid-February of this year. Just as we have seen the previous two times the yield reached this level the sector has rallied. From the lows of February the AMZ is up nearly 50%.

I am always on the lookout for other indicators that can provide some insight into whether it’s time to buy or sell, and recently one popped up on my radar. The claim was that when the energy sector makes up 7% or less of the S&P 500 its equity outperforms over the following three years.

This is just the sort of indicator that interests me. It seems logical that whenever the energy sector weighting reaches some particularly low level, it may have become undervalued and subsequently outperforms.

But is it true? And is there a level at which the energy sector weighting within the S&P 500 indicates that the sector has become overvalued?  These are questions I will investigate in some detail this week in The Energy Strategist.  

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