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Odds are good for a rally in oil services stocks

A man walks back to work at an oil rig drill.

iznashih/Getty Images/iStockphoto

The oil services sector has just entered its period of seasonal strength - and prospects are more promising than usual this year.

According to EquityClock.com, the oil services sector has a period of seasonal strength from Jan. 15 to May 9. The trade has been profitable in 18 of the past 22 periods. Average return per period is 15.9 per cent. The oil services sector has been described as the "energy sector on steroids" based on its relative performance.

Seasonality is influenced by the traditional increase in crude oil and refined product prices during the February to May period as well as an increase in demand for rigs during the winter drilling season.

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Prices for crude oil are increasing thanks to rising demand from economic growth in China, Japan, Canada, the United States and emerging countries. Prices also are expected to increase this spring on political concerns about Iran's potential development of a nuclear weapon. Crude oil bottomed in mid-November at $84.05 (U.S.) per barrel and moved to a five-month high this week.

On the charts, the oil services sector already is showing technical signs of seasonal strength. The Philadelphia Oil Services Index, at 235.50, bottomed in mid-November at 205.92, formed an intermediate uptrend and moved above its 20-, 50- and 200-day moving averages. The Index has outperformed the S&P 500 Index since mid-December.

Preferred strategy is to accumulate equities and related exchange traded funds at current or lower prices for a seasonal trade lasting until May. Exchange traded funds that track the oil equipment and services sector include Market Vectors Oil Services (OIH), Dynamic Oil and Gas Services (PXJ) and Oil & Gas Equipment and Services SPDRs (XES).

Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and exchange traded funds. Daily reports are available at http://www.timingthemarket.ca/. He is also a research analyst for Horizons Investment Management Inc. All of the views expressed herein are his personal views although they may be reflected in positions or transactions in the various client portfolios managed by Horizons Investment Management.

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About the Author

Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. He is also a research analyst for JovInvestment Inc. Reports are available at www.timingthemarket.ca and www.equityclock.com. Follow him on Twitter @EquityClock. More

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