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

Episode Date: March 30, 2026

On this episode of What Did We Learn, Josh Brown, Nick Colas and Jessica Rabe discuss: Oil, energy stocks, and how rising prices are impacting equities and the broader market outlook. How close the S&P 500 and Nasdaq are to historically oversold levels, what a 2 standard deviation drawdown means, and why those setups have led to strong forward returns in the past. Why a -10% year for the S&P 500 is so rare, the three major catalysts behind big drawdowns, and how today’s environment is showing elements of all of them. Plus, what could shift the narrative, the risks of a deeper decline, and what the VIX is signaling about volatility and future returns. This episode is sponsored by Teucrium. Find out more at https://teucrium.com/agricultural-commodity-etfs Sign up for ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Compound Newsletter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ and never miss out! Instagram: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://instagram.com/thecompoundnews⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Twitter: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://twitter.com/thecompoundnews⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ LinkedIn: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://www.linkedin.com/company/the-compound-media/⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ TikTok: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://www.tiktok.com/@thecompoundnews⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Josh Brown are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. The Compound Media, Incorporated, an affiliate of ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Ritholtz Wealth Management⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://ritholtzwealth.com/advertising-disclaimers⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://ritholtzwealth.com/podcast-youtube-disclosures/⁠⁠ Learn more about your ad choices. Visit megaphone.fm/adchoices

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Click the link and the show notes for more. We're back. I miss you. I miss you guys. Hello. Miss you too. Of course, always. All right.

Hey, everybody. Welcome to an all-new edition of what did we learn. I'm here with my friends, Nick Coles and Jessica Raib. They are the co-founders of Data Trek research and the author of Data Trek'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 exciting for me to hear. You guys pumped? Thank you. We're trying to put out as much as we can. All right. Stay modest. All right.

Welcome back. This is what I wanted to talk to you at 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. 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. And what's interesting about saying that these days, I think energy got down to 2% of the S&P as a sector waiting, 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 me? 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? It is. It is. It's kind of crazy. I mean, 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 two, which was, yeah, just tells you all you need to know about how those stocks have worked over, you know, 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 I started in January and February of 1991. 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 Rock 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. 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. 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. 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? What is the, what's the signal in, in prices for these things being a tell? For me, a new high is never a point of stability. A new high means momentum is still, 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 for stocks.

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 in video. 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. Yes, I mean, yeah, it's fascinating. Yeah, Exxonimo will trade 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 InVIDIA. And if you want to use P-E multiples to justify one versus the other, you've got to start thinking about something fairly arcane but super important called reinvestment rates. 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 pay 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 A.I, 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 disciplines 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 A.I.

is very uncertain. The two things, I think, combined to 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 and how the stocks trade. 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 sub-sectors should I be focused on? Like, what industry group within energy makes sense to still buy here? What do you think you're getting more of right now? Short answer. I haven't seen any email come in that asks is the 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. 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. That's easy. Yeah. Well, it's not so easy when you started the year to 1% allocation or zero, which is where a lot of PMs started.

Because, as you said, this group's a long-term loser. Yeah. And who, you know, 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.

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. Yes. But at the end of the day, like if you look at XLE versus PSCE, PSC being the small cap, SB600 energy, they're up 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.

Okay. Getting away from energy, Jessica, the S&P 500 and the NASDAQ are oversold, but are they oversold enough to buy? Well, they're not to the statistical level of oversawed 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 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. So I thought I'd walk us through a summary of that analysis and taking a step. I'm sorry, I think that what that response told you is that people are freaking out. 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 for, 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. 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 training 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's gone on to rally by 9.6% over the next 50 training days. And it was also up 92% of the time. those instances, the other 8% of the time the S&P continued to fall 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 training period, it's historically rebounded by a similar magnitude over the next 50 days with a very high wind rate. But these reversals do require a catalyst in the form of supportive

policy response. 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 NASDAX, not quite there yet, down 10.8% over the last 50 training days. But like you said, yeah, pretty close. So the comps also only had a 2 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. 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 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 day period, it tends to rebound by roughly 10% over the next 50 trading days, unless a 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. 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 just, we're within just 2% of Friday's close. levels. So overall, we are getting closer to tradeably oversaw 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. 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, 20,000, 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, like, or Salesforce, unfortunately, Adobe, I wish I could

have pulled that out, Crowdstrike, Palo Alto networks, all the stuff that's down 30, 40 percent from a tie. But it's a trade, right? And not having seen your data, but just a similar instinct, I don't, I don't, 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 a crude price is falling necessarily boosts the stock. that I just mentioned because oil is the least of their troubles. What do you guys think about that scenario that we're in right now? I think you're right.

Energy and software do not have any logical correlation. More negative correlation for that matter. 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.

then we agree with you. But I'd say if the energy problem is resolved, then the S&Ps got upside and IGV might underperform, but it's not going down. Yeah, in that environment. 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. All right.

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.

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. Sure. Let's throw up the table of a little bit of data here. There have been 12 instances where the S&P is down 10% or more on a total return basis since 1928. and the chart shows those years.

They bucket into three very specific categories. Number one is recessions. If there's a recession, the chances of a down plus 10% year go up quite a bit. And so you have eight examples of that. The average return in a recession year, down 25%, but it's kind of skewed by the Great Depression. So call it down 15, down 20. The second bucket is war, 1940, 1941 going into World War II and 2002 going into 2002 going into into Gulf War II. The average of those is now down 15%. And the third bucket is a policy response,

you know, a big policy or Fed policy response. 2020 is the one example. They are down 18% on the year. That's when the Fed raises rates really quickly to cut off inflation and you end up with a pretty nasty bear market at various points in the year. The problem that we set up the, the set of problem that we have right now is we're kind of touching on all three points. We got a little bit of recession worry because of high oil prices. We got a little bit of war worry because of what's going on in the Gulf and Iran. And we have a little bit of Fed policy worry because Fed funds futures have flipped from thinking Fed cuts to possibility of Fed rate increases if you get the combination of tariff inflation and oil price inflation filtering through the system in a systematic way

that pushes the Fed to raise rates. And whenever the Fed raises rates, the market says, that could be a policy mistake because they don't know when to stop. And we've had many instances where the Fed raises rates too much, even in our lifetimes. Like the 2001 recession was primarily because of the Fed over-extending rate hikes in 2000. So you have this combination of three things, and that's one reason why the market's more than average concern because we have all three inputs that created down 10% year, and that's why we're down seven on the year.

It's really a combination of those three factors. So what typically happens is that prices, whether it's for oil or for stocks or just volatility in general, get extreme enough that it gets someone's attention who's in a position to make a suggestion. What is the off-ramp? What can we do about this? Do you think that that's how this particular moment plays out

or not necessarily? Well, it's super, I mean, not to be facile in giving my answer, but it's very hard to know because, as they say on the battlefield, the enemy gets a vote too. So we can structure a policy that we think makes sense, but the enemy gets a vote as well. Iran gets a vote as well. And so far they're voting to say we're not going along with the game plan, at least to the public-facing messaging that they're giving. The game plan is we won and now we're going to discuss the terms of a truce and that should bring gasoline prices down. but Iran is saying, yeah, we're not talking to anybody in Washington and we're not going along with any 15-point plan.

And that seems to be where we are as of this morning. It does. And I'll tell you, I had this, you know, you're sitting around in New York long enough and you end up having some pretty interesting conversations. And I happened to chat for about an hour with the Qatari Royal on Friday afternoon. And he was in town on some health issues, but he's obviously a fairly well-pluged an individual in the gullible. And I asked him, we talked about this for an hour with another policy guy that was in the room. And his perspective was, you know, Iran wants to feel like an important nation in the area. And in order to do that, they express their policies in very violent ways.

They're not going to stop doing that. They're not going to hand over the way they've become relevant in the Middle East just on a whim. It's going to take a major change in their thinking, a major change in the leadership to have a major change in policies. So right now, this is not like Gulf War I where Iraq invades Kuwait. The nations of the world say we're not going to put up with that. They form a coalition led by the U.S. They walk into Kuwait, liberate it, and then tell Iraq to cut it out. That was a very neat and clean solution relative to what we have today.

And that's where the historical analog kind of falls apart. But what you mentioned is a good segue into the other table that we brought for you today, which is the VIX stuff. Maybe we can flip to that. So this table shows the forward return. turn on the S&P 500, one week, one month, three months, six months in a year, after the VIX closes at various levels. And the levels that we've cited, 27 to 35, 35 to 43, 43 to 53 to 51, and 51 above are one, two, three, and four standard deviations above the long run mean for the VIX. So kind of gives you a sense of when

volatility is elevated and whether it's statistically significantly elevated. And the takeaway from this table is when you have moderate volatility, the VIX between, say, 27 and 43. The outcomes for buying are usually pretty good. So you buy these closes and on average, you're up over the next week, month, three months, six months, one year, and your win rates are all north of 50%. So you're better than coin flip buying periods of volatility that are relatively modest. Then you get normal volatility. Normal volatility. Normal excess volatility. That's not too oxymoronic. Right, right. Got it. When you get to policy, when you get to VIX levels are above 43, that relationship breaks down because what you find are win rates get closer to 50.

If you're buying above 51, your win rate for one week is less than 50%. And it only gets to 66% after six months. And the returns are lower on average than if you bought the VIX at lower levels, which seems counterintuitive, but I think ties directly into this conversation. Because to your point, you have stimulus in response, call in response, markets call policymakers respond. When that relationship works as it should, for example, the way it did last April during the trade shock, then you get good forward returns because the volatility in the market signals if there's something to policymakers that they've gone too far and they got it back away. And that's

exactly what happened. The VIX closed at 52 on April 4th, I want to say, and that was a low. That was the day Trump said. The policy response was those numbers aren't the numbers. Right. And we're going to negotiate and boom and everything worked out fine. That's the clean example. when the VIX playbook works great because it's an interaction between markets and policymakers. Same thing in Q4 of 2018. Powell had said the neutral rate was higher than it was. The market puked 20%, closed at the lows on Christmas Eve. The VIX was at 36, and he changed policy 10 days later. So the VIX is a brute force method of the market telling policymakers when they're wrong. That usually works when it doesn't, like in 2008, Q4, 2008.

then you don't get the lows very quickly. And the VIX just keeps jamming away at high levels, you know, north of 50. And your forward returns kind of suck for a while because the policy hasn't changed. And that ties back to Jessica's point. All these statistics, all this analysis works through an implicit assumption that markets signal to policy makers when they have to change course. I think the scary part here is that in a situation where the Fed is going too far or the market has decided. the Fed is going too far. The policy response is obvious.

It's you send somebody out to give a speech, hinting at an about face or dovishness or, I mean, we've seen Jay Powell reverse himself. Like it's an obvious thing. In something that's oil or war related, I suppose you could try out the strategic petroleum reserve and you could dump 50 million barrels of oil on the market, at least talk about the fact that you're thinking about doing it. Maybe that helps, but maybe it doesn't. And in this case, it seems like it's just not obvious what the policy responds to a 50 vix would even be. We've already declared victory. So it's certainly not saying the war is over. And to your point,

it's not completely up to us anymore. So you guys think about that. The world uses 110 million barrels of oil a day. Yeah. A day. A day. Every single day. 20% of it goes through the straits. Right. And there's a limit to what you can do in that world with things like SPR or revoking the Jones Act and allowing the export of oil or any of the other things that you see trial balloons going up about. It's not really going to resolve the issue if that's the issue. Yeah. Well, look, there's no point in getting too bearish here because the upside cases are just as valid as the downside cases. here. I think the only thing is important is to recognize, like, use whatever systems that you have at your disposal, like the ones we're discussing today, to find levels that are appropriate for you to

buy and understand why the history works the way it does and use that in interpreting where the market goes from here. Well, guys, that's very comforting, and I'm glad we could end it on a more optimistic note. I do like the win rates of buying this level of turmoil, but I am also aware of the fact that sometimes this level of turmoil is not the stopping point. It's only the halfway point. And that's what makes what we all do, I guess, so challenging, so interesting, so exciting, sometimes not the type of excitement that we're looking for, but we get it either way. But I want to say thank you guys so much for coming back and checking in with us. Let's tell people where they can follow the Datatrek channel.

We know we go to Datatrekresearch.com to learn more about your daily note. And the channel is, what's the URL? It's at Nicole and Jessica Raib on YouTube. On YouTube. All right. And we're going to include a link to that in the show notes as well. Guys, thank you so much. We will check back in with you later this spring.

Thanks very much. Thank you. All right. Cheers. Thanks for watching, everyone.