The Stock
ShawCor Ltd.
Recent price: $26.28
Trend
This month's drop of almost 10 per cent in the S&P/TSX composite index and the Canadian dollar's stumble to 92 cents (U.S.) reflect growing concerns about the global economy's prospects as the euro zone tries to manage its debt crisis, but is more directly traced to short-term strengthening of the U.S. dollar and a dampening of commodity prices - especially crude oil.
The price of crude has dropped below $70, near last summer's mark after crude recovered from sub-$40 lows ushered in by the 2008 financial crisis. Although lower crude and gasoline prices are an obvious positive for consumers, investors holding out for better times in the energy sector have hit a fork in the road. Depending on the depth of an investor's time preference the path seems clear: long-term stakeholders like China's state-sponsored entities continue to assemble energy assets and make media headlines, while shorter-term retail investors quietly exit stage right.
Oil services stocks are predictably showing the negative implications of falling oil prices on the sector. Most have faltering price trends and are underperforming the sinking stock market. The tragic Gulf of Mexico oil spill cast a dark shadow over the drillers, but the retreating price of crude oil has put its stamp on the 27 per cent drop in the Philadelphia Oil Services Sector Index since its high of a few short weeks ago. Energy sector investors in the sector are being told to stay away in May.
The Trade
Pipeline and pipe services provider ShawCor Ltd. is a current Stock Trends Bearish Crossover stock, signalling that the long-term trend category has changed from bullish to bearish. When a stock's 13-week moving average drops below its primary trend line - the 40-week moving average - long-term investors should be asking serious questions about the holding, if not already selling.
Although ShawCor's share price recovered from its low near $24 early last week to close Friday above $27, this month's selloff exposes the stock to continued sector weakness going forward. ShawCor shareholders not yet shaken out in recent heavy trading volume should heed the bearish trend cue.
The Upside
Energy sector investors have suffered a period of underperformance so far this year. This is one trend that will persist for the likes of ShawCor and other oil services stocks. More generally, as the broad stock market sentiment shifts - the ratio of Stock Trends Bullish to Bearish stocks on the TSX has dropped from 4:1 to 2:1 since the end of the first quarter - trend-following investors will continue to take equity holdings off the table. ShawCor's stock will feel pressure likewise, trending below the $26 level as we approach the dog days of summer and possibly slipping another 20 to 25 per cent toward last summer's low if the sector skid persists.
The Downside
What if the price of crude oil rebounds? The risks to the stock currently seem to trump that view, but a rally above trend line resistance currently near $28 would signal a return to stability in the sector.
Skot Kortje