The XLE has improved in our sector ranking methodology primarily because the US Crude price has shown considerable strength vs. the Bloomberg Commodities Index spurring inclusion over the XLB in our Elev8 Sector Rotation Model.
Price Action & Performance
XLE has shown signs of nascent bullish reversal since putting in a near-term low on June 14th, and briefly moving above the previous near-term high at $91.27. The oscillator work hit oversold conditions prior to the low and the daily MACD study has signaled a short-term buy in the ETF. Going forward we see overhead resistance at $93.16. The XLE has lagged the S&P 500 by 6% on a simple return basis in 2024 and triggered a 52-wk relative-low vs. the S&P 500 on 6/14 confirming the long-term downtrend. In the context of price, our long position is expected to be tactical in nature, but given pervasive weakness across economically sensitive cyclical sectors, the XLE is a preferrable exposure to XLB in our work and has triggered a tactical buy signal.
Economic and Policy Drivers
Crude inventories are expected to remain elevated in July, but the Sector has bounced on optimism that Donald Trump will regain the presidency after a particularly miserable debate performance from Joe Biden at the end of last week. A Republican administration is perceived as bullish for legacy energy producers which comprise the lion’s share of the GICS Energy Sector. Concerns of a global supply glut remain amidst societal trends away from fossil fuels (vehicle electrification, alt. energy infrastructure, ex-US ESG initiatives) and ever more readily available alternative energy streams coming online. Given those longer-term constraints, we see this position as a tactical opportunity. Negative expectations on inventory build-ups also lower the bar for positive surprise, and, against the backdrop of intermediate term oversold conditions for the XLE, set the table for a bounce.
How Can XLE Help?
XLE offers exposure to 23 of the largest US domiciled Energy Co’s. As such it offers superior liquidity and stability vs. the broad market Energy Sector. If inflation prints hot enough to tip the US Economy into recession, Crude and the Oil Majors like XOM, CVX and COP typically outperform through the middle of the recession historically. If the economy continues to surge amidst dissipating inflation, the Energy sector potentially benefits from being in the Value cohort of the equity market and would cushion the blow from any rotation into more risk seeking stocks as a historically higher-beta sector. Value companies typically do well when earnings are abundant, and the cost of capital is rising, so any organic (non-policy driven) rise in interest rates on any kind of optimism for forward economic Growth would likely be a boon to the sector. XLE should be expected to work if Inflation is high, and earnings take a hit. It should also work if inflation is high, and earnings are strong. Continuing fundamental weakness would be the pure downside scenario, but even in that case, the technicals of the XLE have firmed up better than its adjacent sector XLB and we prefer it this month in our model.
In Conclusion
The technical, economic and fundamental cases for owning Energy shares are challenged at present, but the price action for XLE is showing improvement vs. XLB and is our choice for Commodities-linked exposure this month. Our Elev8 Sector Rotation Model Portfolio starts of July with an OVERWEIGHT allocation to XLE of +1.35% above the benchmark S&P 500.
Chart | XLE Technicals
- XLE 12-month, daily price (200-day m.a. | Relative to S&P 500)
- Relative Strength Curve is now far below downtrend resistance and showing some positive signs of reversal. This has triggered a tactical buy signal from the MACD oscillator (panel 4), a distinguishing positive compared to XLB
- A price move above resistance at the $93 level would be interpreted as bullish confirmation
Data sourced from Bloomberg
