Advantage Data: Energy leads as junk sectors turn solidly positive after two weeks of losses

By Paul Deckelman

New York, Oct. 13 – The junk bond market turned solidly positive last week, breaking out of a two-week slump, according to the latest sector-tabulated bond-performance statistics supplied to Prospect News on Tuesday by Advantage Data Inc.

Last week’s result was in sharp contrast to both of the previous two weeks, during which the vast majority of sectors had negative returns for the week.

Those downside weeks had followed one week during which the sectors had been evenly split between gainers and losers and three consecutive weeks before that during which more sectors had advanced than retreated. Those three positive weeks in late August and early September, in turn, had followed three straight weeks going back to the beginning of August when more of those market groupings were on the downside than on the upside.

Generally speaking, Junkbondland has been choppy ever since the end of a long winning streak in early May, with the market experiencing periods of a week or two of gains alternating with a couple of weeks of losses.

Over the last 10 weeks, going back to the week ended Aug. 7, more sectors have been worse in five of those weeks, more have been better in four of them, and, as noted, they were evenly split in one week, ended Sept. 18.

Things have been more positive on a somewhat longer-term basis; with 40 weeks now in the books so far this year, 24 weekly advances have been recorded during that time, versus 15 weeks on the downside and the aforementioned one evenly split week.

A subset of the 33 most significantly sized sectors (out of the total of 62 broad-industry sectors into which Boston-based Advantage Data currently divides its entire high-yield universe), as measured by the number of bond issuers, the collective number of issues tracked and their total face amount outstanding, showed all 33 of those more sizable sectors closing in the black during the week ended Friday, with none of them actually finishing in the red.

That was a far cry from the profoundly negative pattern seen the previous week, ended Oct. 2, when 29 of those larger sectors ended in negative territory with only one of them ending on the positive side of the ledger.

In the interim, Advantage Data recalculated and expanded its overall sector roster to a total of 62 from 59 the previous week, including three more of the larger-sized sectors, raising the total number of the latter to 33 from 30 previously. The changes reflected a more intense focus on the oil and natural gas industry, including new sectors covering energy exploration and production, mid-stream operations such as pipelines and storage and oilfield services, such as drilling and technology. (The new sectors have been split-off from the catch-all energy sector previously called oil and natural gas exploration and production for the purposes of this report; that latter sector remains in the index as one of the 33 key sectors and shall henceforth be referred to as oil and gas extraction).

The recent negative pattern had also held sway during the week ended Sept. 25, when 26 sectors ended showed losses, just three had gains and one sector ended the week with a flat 0.00% reading, indicating neither a gain nor a loss.

That was in contrast versus the Sept. 18 week, when 14 of the larger sectors showed gains on the week, 14 showed losses and two sectors were unchanged.

The week before that, ended Sept. 11, 28 of those key sectors ended in positive territory and just two closed in negative territory.

Among specific sectors last week, the new energy exploration and production sector was the best-performing large sector on the week, followed closely by several of the other energy-oriented sectors, while insurance carriers were the worst key-sector performer.

Coal mining remained the single worst performer on a year-to-date basis for a 39th consecutive week, while lodging had the best cumulative return of any major sector for a 32nd straight week.

Indicators, index higher

Other statistical indicators of general junk market performance mirrored the upturn seen in the sectors, turning higher across the board last week from where they had been the previous Friday.

That broke a losing streak of three straight weeks before that.

The Merrill Lynch High Yield Master II index, meanwhile, also broke out of its recent skid, putting up its first weekly gain following three weekly losses in a row.

The index zoomed by 2.702% on the week, in contrast to the week before, when it had plummeted by 1.78%, setting a new mark for the largest weekly loss for the year so far. Last week’s huge gain was its biggest weekly advance for 2015, easily topping the 0.964% rise seen the week ended Feb. 16, and was one of the biggest weekly gains ever recorded.

However, the index has still been down in four weeks out of the last eight and in six weeks out of the last 10, in 10 weeks out of the last 16 and in 13 weeks out of the last 21. However, for the year to date, gaining weeks still outnumber the decliners by a 23-to-17 margin.

The latest week’s big gain slashed the index’s year-to-date deficit to minus 0.45% from 3.069% the previous Friday, which had been its worst cumulative loss for the year, surpassing the 1.312% year-to-date loss recorded the week before, as well as the index’s biggest cumulative loss since Oct. 5, 2011, when it had showed a 3.834% loss for the year.

Its peak gain for this year, meanwhile, was the 4.062% at which it had ended on May 29.

The index had finished 2014 returning 2.503%.

Among its other components, Friday’s yield to worst had declined to 7.587% from 8.222% the Friday before – the highest yield seen so far this year. Its low point for the year so far has been 5.843%, seen on Feb. 27. The yield had ended 2014 at 6.448%.

Its spread to worst over comparable Treasury issues narrowed to 617 basis points, after having ballooned out the week before to a year’s widest 685 bps. Those levels still compare unfavorably with the spread to worst on the last day of 2014 of 513 bps, as well as its tightest point this year of 451 bps on March 2 and again on March 3.

And its average price of the bonds tracked by the index rose to 94.06393 from the previous week’s 91.67313, its low level for the year. It had ended 2014 at 98.8747, while its high for this year was 101.3272, set on Feb. 27.

Energy leads rebound

Back on a sector-by-sector basis, Advantage Data meanwhile showed a number of the various energy- related sectors having turned in unusually robust performances, given the troubles that energy has seen most weeks in past months.

The new exploration and production sector turned in the strongest showing of any large-sized grouping, surging by 4.79% on the week.

Other sectors showing great strength last week included oil and gas extraction (up 4.57%), coal mining (up 4.13%), oilfield services (up 3.21%) and midstream energy and primary metals processing, both up 2.51% on the week. The latter was the only non-energy grouping finishing among last week’s Top Five best-performing sectors.

Oil and gas extraction, coal mining and primary metals processing had each been among the Bottom Five worst-performing large sectors the week before, with losses of 4.60%, 2.48% and 2.33%, respectively. O&G extraction, in fact, had been the single worst-performing large-sized sector that week, while coal mining had that dubious honor in the two straight weeks before that.

Before last week, coal – a chronic underperformer, outside of random flashes of strength when the volatile sector has temporarily been among the best finishers, had been among the Bottom Five in 23 weeks out of the previous 27 and in 26 weeks out of the prior 30. It had been the single worst performer in six weeks out of the previous nine and going back further, in 19 weeks out of the previous 23.

Insurers among the weakest

On the downside, the insurance carriers (up 0.27%) had the smallest gain of any of the large-sized sectors last week. The previous week (in which almost all of the sectors had shown losses), it had been among the relatively better performers with just a 0.56% loss and had been among the Top Five in two weeks out of the previous three, in three weeks out of the previous five and in four weeks out of the prior seven.

Also showing relatively muted returns last week were industrial and commercial machinery and computer equipment manufacturing (up 0.39%), real estate (up 0.45%), food stores (up 0.52%) and paper manufacturing (up 0.66%).

Those Bottom Five finishes for real estate and the food stores, along with the insurers, was in sharp contrast to their recent status as Top Five finishers; real estate had been there over the previous three straight weeks, while the grocers had been there over the prior two weeks.

YTD: Lodging still on top

On a year-to-date basis, the lodging sector remained booked into the penthouse suite as the best year-to-date performer among the major sectors for a 32nd straight week with a gain of 20.09% for the year so far.

The food stores grouping (up 8.83%) was in the runner-up spot for a 21st straight week and for a 22nd week in the last 23.

Real estate (up 6.07%) improved to third-best on the year, despite not having been among the leading cumulative performers the week before.

Securities and commodities brokers, dealers and exchanges (up an even 5%) improved to fourth-best on the year from fifth place the week before.

Depository financial institutions (up 4.91%) fell two notches in the standings to just fifth-best after having been third-strongest the previous week and fourth-best in the two weeks before that.

None of the week’s best finishers were among last week’s year-to-date leaders.

YTD: Coal still buried

On the downside, coal mining continued to wallow at the bottom of the pile as the worst year-to-date performer for a 39th straight week, showing a 34.05% year-to-date loss.

The newly broken-out energy E&P sector – despite being the week’s best large-sector performer, as noted – was second worst on the year so far with a 14.22% loss.

Oil and gas extraction (down 13.95%) improved, relatively speaking, to just third-worst on the year, after having been second worst for the previous seven straight weeks.

The newly broken-out oilfield services sector (down 9.34%) was fourth-worst on the year.

Metals mining (down 8.25%) showed relative improvement, moving up to just fifth-worst on the year after having been third-worst over the previous seven weeks.

None of the week’s worst finishers were among last week’s year-to-date underachievers.

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