On several occasions, we’ve highlighted the severe underperformance in health care, with its 1-year rate-of-change spread versus the S&P 500 contracting to the second-lowest level ever. This extreme reading set the stage for a powerful mean-reversion setup. That thesis has since played out, as numerous stocks have rebounded and our dual-trend system has generated a wave of buy signals across the sector.
Another area now capturing our attention is energy, where the 3-year rate-of-change spread versus the S&P 500 plunged to -84% in November — one of the lowest levels in history, surpassed only by the 2020–21 period.
Two things come to mind. First, that earlier episode was defined by falling prices, whereas today’s underperformance stems from a massive, prolonged sideways consolidation. Second, the swings in relative performance over the last five years have been unprecedented, possibly hinting at a structural change in the sector’s behavior.
Generally, consolidation breakouts occur in the direction of the last primary trend, which would suggest an upside resolution. Increased energy demand for AI could be the catalyst. Rather than anticipate, we’ll let our dual trend system tell us when it’s time to act.
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