Never Sell Your Energy Stocks - Nick Colas and Jessica Rabe of DataTrek

0:13Jessica Rabe:Today's show is sponsored by Tucrean. Looking to diversify your portfolio beyond stocks and bonds? Commodities are getting more and more attention as we enter 2026. Tucrean's agricultural ETFs offer a way to access the futures prices of essential crops. These funds may help manage inflation risk and add diversification to your portfolio. Ask your financial advisor or explore Tucrium ETFs on your own. Visit tucrium.com. That's T-E-U-C-R-I-U-M.com. Click the link in the show notes for more. We're back. I miss you. I miss you guys. Hello. Of course.

0:57Josh Brown:All right.

0:59Jessica Rabe:Hey, everybody. Welcome to an all new edition of What Did We Learn? I'm here with my friends, Nick Colas and Jessica Rabe. They are the co-founders of Datatrek Research and the author of Datatrek's morning briefing newsletter, which goes out to over 1 ,500 institutional and retail clients. Nick and Jessica also have their own YouTube channel, which you can find a link to in the description below. And I'm told your YouTube channel is now blowing up. That's pretty, that's pretty exciting for me to hear. You guys pumped? Thank you.

1:30Josh Brown:We're trying to put out as much as we can.

1:33Jessica Rabe:All right. Stay modest. All right. Welcome back. This is what I wanted to talk to you about first. Nick, you told me something a very long time ago, and you've repeated it since. And I think it's been super helpful for me and also for the people in our audience. You can never really sell your energy stocks because that's your only hedge against an oil price spike. And right now we are living through one of the all-time great oil price spikes, I guess just in terms of the speed with which it happened. And that adage of yours has proven itself to be very true. So when I look at the various stocks that I'm involved in this year, outside of utilities and a handful of industrials, it's really just the energy stocks that are working.

2:23Jessica Rabe:And what's interesting about saying that these days, I think energy got down to 2 % of the S &P as a sector weighting, which is maybe the smallest that I've ever seen it since I've been in the industry. And so the temptation to just say, last year, why do I own these stocks? They never go up. They're so tiny. They don't do anything in relation to the overall market. That's been flipped on its head this year. Is that the way you see it?

2:52Nick Colas:It is. It is. It's kind of crazy. When I started looking at the stock market in 1980 when I was in high school, energy was 20 % of the S &P. And it got to 2%, which just tells you all you need to know about how those stocks have worked over a very long holding horizon. The way I think about it really is anchored in the 1990 experience, and we have a little chart to put up and kind of talk to these, and we can discuss this group. But back in 1990, we had a somewhat analogous situation to today where Iraq invaded Kuwait, kind of out of the blue, and oil prices very quickly doubled. And the way the market traded that event was oil peaked in mid-October, long before Gulf War 1 started in January and February of 1991.

3:39Nick Colas:Oil peaked roughly$40,$45 a barrel over a double versus just a few months prior. So that was the oil shock. Energy stocks traded very well through that peak in oil and not so well afterward. And stocks bottomed on the day of the oil price peak in mid-October. So the S &P hit its bottom for that event long before military action, long before anything was really known about how Iraq was going to get kicked out of Kuwait. But oil prices were the real tell. And oil prices right now, as we know, are at hitting new highs literally as we speak. 102, I think, was the level I saw before I came on the screen.

4:20Nick Colas:And energy stocks are making a new high today as well. To me, that kind of implies that the market hasn't bottomed yet, if we're using the 1990 playbook as an example, which I think is fairly robust because the two situations are somewhat comparable. And so you end up with a situation where the market's going to have to pay attention to oil prices. That's going to be our tell. And until oil prices stabilize, and it can happen long before we know the military outcome, but they will still keep rising until that uncertainty peaks out. And it hasn't happened yet.

4:48Jessica Rabe:When you say stabilize, is the price of oil stabilizing at around$100 a barrel right now? And are these stocks stabilizing at year highs? Like, is it possible that they plateau? Or do we need to see the full roller coaster of the up and the down? Like, what's the signal in prices for these things being a tell? For me, a new high is never a point of stability.

5:16Nick Colas:A new high means momentum is still in place, both in the stocks and in the commodity. So for the moment, no, we don't have stability. We need to see a peak and I think at least a week's worth of where these things don't make new highs before we begin to think, okay, that might have been the bottom four stocks.

5:33Jessica Rabe:I think Exxon, as we're talking, is at a record high. I'm long the stock. I think it's$175, and you point out it's now more expensive on earnings than NVIDIA. I'm not saying that's good or it's bad or it makes sense or it doesn't. but Exxon seems to have a bigger catalyst in front of it than NVIDIA. We know that the oil they're selling, even if you account for hedges or higher costs, is being sold at a way higher price than what anyone thought it would be as recently as February. So, you know, it's an explanation for how it got here, maybe not a justification for why it'll stay here.

6:16Nick Colas:Yes. I mean, it's It's fascinating. Yeah, ExxonMobil trades for 25 times earnings. NVIDIA trades for 20 times forward earnings. You know, a rich to NVIDIA for an energy stock. I don't think anybody had that on their bingo card at the beginning of the year. But it does highlight how difficult it is to use PE ratios just in a kind of blind sense to judge whether a stock is expensive or cheap because you can't find two more different stories in the world than ExxonMobil and NVIDIA. And if you want to use PE multiples to justify one versus the other, you've got to start thinking about something fairly arcane but super important called reinvestment rates.

6:50Nick Colas:How much does a company plow back into its business versus and what do its customers do versus one versus the other? So for example, energy companies pay very high dividends and they will pay roughly half of all their net income this year in dividends. For tech, it's only 11%. Reinvestment rates in tech are very, very high. And now with the catalyst of Gen.AI, virtually every big tech company, Apple excluded, is reinvesting all its cash flows in Gen.AI, NVIDIA being the primary beneficiary. So you end up comparing a company or an industry like energy where they're very capital disciplined, where they pay back half their earnings in dividends, and dividends are money good, versus an industry where your reinvestment rates are very high and your outcome from Gen.AI is very uncertain.

7:40Nick Colas:The two things I think combined explain why energy stocks have done so well this year. Because you have PMs thinking, okay, do I want to own a bunch of stocks that are reinvesting in the science project? Or do I want to own a bunch of companies where I get half the net income back this year? I don't have to worry about reinvestment rates. And the industry has kind of proven itself to be generally more disciplined in terms of capital allocation now than even 10 years ago, kind of pre-shale. So you have just the most amazing bookends of corporate finance stories between these two sectors. And it's really showing in how the stocks trade.

8:13Jessica Rabe:Anecdotally, what are you guys hearing from your institutional clients? Are they asking more questions about, is it time to take profits in energy? Or are you still getting questions like, what energy subsectors should I be focused on? Like, what industry group within energy makes sense to still buy here? Like, what do you think you're getting more of right now?

8:35Nick Colas:Short answer, I haven't seen any email come in that asks, is it time to take profits? Not a single one. Not yet. No, because we drill into clients' heads. You do not sell new highs ever, ever, ever. And so either they disagree or at least they know not to ask. So as long as these things make new highs, they understand our point of view. The thing we're telling them still to this day, even in last night's report, is you got to be at least index weight this group because you just don't know. Which is tiny.

9:06Jessica Rabe:That's easy.

9:07Nick Colas:Yeah. Well, it's not so easy when you started the year at a 1 % allocation or zero, which is where a lot of PMs started. Because as you said, this group's a long-term loser. And you can reallocate that 4 % to tech. Now, we're still saying no matter where this level is, you got to be index weight, 4%, 5%. The question we do get sometimes is small cap versus large cap because it's a very different dynamic. But in the small cap names, they're not as solid. They're not as good on average. They're kind of at the very best, very most generous. They're spicy names.

9:37Jessica Rabe:That's still the beta trade is to find like a target resources versus an Exxon and make the bet that you're going to get more bang for your buck because it's smaller.

9:48Nick Colas:Yes. But at the end of the day, like if you look at XLE versus PSCE, PSCE being the small cap, S &P 600 energy, they're about the same for the year. There's not been a big premium for owning the small caps because that group kind of got hollowed out between private equity buying and take privates. You don't have as many high-quality names as perhaps a decade ago.

10:07Jessica Rabe:Okay. Getting away from energy, Jessica, the S &P 500 and the NASDAQ are oversold, but are they oversold enough to buy?

10:16Josh Brown:Well, they're not to the statistical level of oversold that we'd like to see quite yet. So that's what I'll go over now because, yes, the question on everyone's mind is, of course, When are the S &P 500 and NASDAQ comp oversold enough to buy? So we laid the foundation to address this topic in a video last week that you alluded to, explaining why even though markets felt unsettled, we weren't at those levels yet. And the response on YouTube was like, nothing we've experienced yet. So that told us there's probably a lot of interest in a statistically robust approach to analyzing how stocks may trade over the near future.

10:55Josh Brown:So I thought I'd walk us through a summary of that analysis and take it a step further.

11:00Jessica Rabe:Sorry, I think that what that response told you was that people are freaking out.

11:04Josh Brown:Yeah. Better said, Josh. Yeah, so I thought I'd just walk us through a summary of that analysis and take it a step further by discussing what it says about logical entry points for the S &P and NASDAQ if we see even more weakness in the next week or two. So this first chart shows the S &P 500's 50-day trailing price returns from 2010 to the present. So for your reference, 50 trading days is about two and a half calendar months. And I also just want to quickly note that we purposely only went back to 2010 because the 2008 financial crisis and protracted bear market was due to a multiple systems failure all at once.

11:41Josh Brown:And we don't think that sort of risk applies today. So the key level to note here is that when the S &P falls by 9.6 % or more over any given 50 trading days, we're in truly unusual territory because that's two standard deviations from the long run mean, that red line that I marked in the chart there. The S &P is down 8.1 % over the last 50 trading days. So it's not quite to the two sigma level yet, but it could absolutely get there soon. And it's only had a two sigma 50-day move 4 % of the time since 2010. But when that's happened, the S &P has gone on to rally by 9.6 % over the next 50 trading days.

12:21Josh Brown:And it was also up 92 % of the time in those instances. The other 8 % of the time, the S &P continued to fall. It was mostly in 2022 because of the Fed's aggressive rate hikes that year. And a few instances in 2011 because of the uncertainty around the Greek debt crisis. And during those instances, the S &P was down anywhere from 22 basis points to 8.9%. But overall here, the takeaway is that when the S &P falls by roughly 10 % over a 50-day trading period, it's historically rebounded by a similar magnitude over the next 50 days with a very high win rate. But these reversals do require a catalyst in the form of supportive policy response.

13:03Josh Brown:That's super important here. So now let's just take a look at the NASDAQ comp. I'll give you the important levels for that. The key level to watch here for the comp is a pullback of 11.9 % or more over any given 50 trading days. Since again, that's two standard deviations from the long run mean. And like the S &P, yeah, we're really close. And like the S &P, the NASDAQ's not quite there yet, down 10.8 % over the last 50 trading days. But like you said, yeah, pretty close. So the comp's also only had a two sigma 50 day move 4 % of the time since 2010. And when that's happened, it's gone on to rally by an average of 9.6 % over the next 50 trading days.

13:43Josh Brown:It had a lower but still a very strong win rate of 81%. And the only times the comp still went on to fall after a two sigma move was in 2022. And it was down from as little as 40 basis points to negative 14.1%. So the takeaway here is similar to the S &P in that when the NASDAQ falls by 12 % over a 50 trading day period, it tends to rebound by roughly 10 % over the next 50 trading days unless the macro backdrop stays negative like in 2022. So the analog today is, of course, uncertainty about the war and Iran and what it might do to oil prices over the medium term. Now, because these are rolling 50-day returns, the exact thresholds will shift day to day.

14:29Josh Brown:But here are the key levels to watch. So if the S &P 500 and NASDAQ fall below 6 ,250 and 20 ,650 by this Friday, respectively, they will hit the two standard deviations. And both were within just 2 % of Friday's closing levels. So overall, we are getting closer to tradably oversold levels for the S &P and NASDAQ. Importantly, we're not calling it, we're not calling a bottom, but history does suggest that once we do reach those thresholds, 50-day forward returns are typically positive and highly consistent as long as policy addresses the issue at hand.

15:06Jessica Rabe:Well, we're going to get to the policy question in a second because I'm not even sure what the right policy would be in this situation. but 6250 S &P, 20 ,650 NASDAQ. These are the levels. Okay. The win rates on buying a two standard deviation down move in a 50 day period, 92 % and 81 % respectively. That almost gets into the territory of like put on a blindfold and just buy something. I did that on Friday. I bought the IGV software ETF, and you know what's in it. It's Palantir, Microsoft, Salesforce, unfortunately, Adobe. I wish I could have pulled that out. CrowdStrike, Palo Alto Networks, all the stuff that's down 30%, 40 % from a tie.

15:57Jessica Rabe:But it's a trade, right? And not having seen your data, but just a similar instinct. I didn't know that the win rate for market-wide was 92%, for example. But I guess what I wanted to ask you is I feel like people are conflating two different stories. They're saying like oil prices are bad for stocks. Software has been selling off hard. Therefore, there's something about the oil versus software. But I don't think it's that. I think we have two sort of rolling, quiet crises on our hands simultaneously. And I don't know, for example, that crude prices falling necessarily boosts the stocks that I just mentioned because oil is the least of their troubles.

16:47Jessica Rabe:What do you guys think about that scenario that we're in right now?

16:52Nick Colas:I think you're right. Energy and software do not have any logical correlation.

16:58Jessica Rabe:More negative correlation for that matter.

17:00Nick Colas:Yeah, I mean, I think it's got to be close to zero. Look, Jessica just did a video about exactly this topic. IGV is way oversold. People can go watch that video. It's fantastic, and it's got all the numbers. So your heart's in the right place, and we agree with you. But I'd say if the energy problem is resolved, then the S &P's got upside, and IGV might underperform, but it's not going down. Yeah, in that environment.

17:23Jessica Rabe:It'll work. Yeah. Yeah, yeah. Okay. Jessica, you agree? Yes. Okay. Well, we're going to need those stocks. These are not small companies. We need Microsoft to do something.

17:38Josh Brown:I'll just take one more even bigger picture, larger view. And I'm talking about indices in general, like the S &P 500 and the NASDAQ. Just as a younger investor, I understand that these crises can feel novel and unpredictable. But that's exactly why it's important to lean on history and understand that even though the reasons for economic shocks are always different, they always see a lasting resolution. So it's important to at least stay invested in these periods regardless of how painful it feels and even add to your portfolio if you can. And that's why we are giving these database parameters.

18:17Jessica Rabe:Well, maybe let's get into the novelty. Nick, you mentioned the S &P down 7 % year to date. More than halfway to a down 10 % year is fairly unusual over the last century. Let's get into that.