Price Action & Performance
XLE has outperformed since March 1st. Price action for the XLE is bullish from a technical perspective with price consolidating above its 2023 price high at just below $94. That level is now key support for XLE. Longer-term the sector had retraced 50% of its outperformance from 2021-22, but with the upside break-out on price and the Fed agitating for a potentially more hawkish course, Energy has potential to continue higher in the near-term. Since the Energy sector is highly correlated to the prospects of Crude Oil. The Crude chart has improved in 2024 and has seen its 50-day m.a. cross above the 200-day m.a. which is a tactical buy signal.
Economic and Policy Drivers
It has been counter-intuitive to watch Energy shares broadly underperform from the inception of the latest Middle East conflict between Israel and Hamas in October through their trough in January, but with inflation taking a few first nibbles out of XLK and XLC outperformance over the past month, tailwinds have been gathering behind the XLE. Energy companies typically bucket as Value plays, and Value with its propensity for generating low–cost cash flows typically outperforms Growth when interest rates are rising.
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 despite emerging inflation, the Energy sector benefits from being in the Value cohort of the equity market. Value companies typically do well when earnings are abundant, and the cost of capital is rising. XLE would likely provide a boost to portfolios in two out of three of this month’s likely big picture scenarios. It 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. The area where it would be vulnerable is if we had a soft CPI print and investors flooded back into Growth areas of the equity market without any consolidation or Fed policy pivot.
In Conclusion
When inflation is top of mind, XLE should market weight in a portfolio at minimum. Longer-term charts suggest that the bull market which began in 2023 is not over, but with inflation acting sticky the stage is set for a more involved consolidation than we’ve seen so far. I would expect the time to get back to big over-weight positions in Growth Sectors is a bit down the road. I would recommend an overweight exposure in XLE for May.
Chart | XLE Technicals
- In absolute terms, XLE price has broken out above long-term resistance and projects an upside target above $112
- Relative Strength Curve (blue line) is challenging overhead resistance. A move above the dotted red line would be a bullish signal for the XLE
