Despite policy expectations shifting from hawkish to dovish over the summer, the XLE hasn’t shown any meaningful technical improvement. Secular headwinds from EV’s continue to dampen any speculative enthusiasm for the sector. We turned negative on XLE in early August, and we continue to recommend XLE as a short position for September.
Price Action & Performance
XLE showed signs of nascent bullish reversal in July, before breaking to lower lows on price and vs. the S&P 500 benchmark in August. The XLE has been in a downtrend since April, and oscillator work hasn’t shown any emergence of buying power over that time period. The chart has been unable to achieve overbought conditions even on a near term basis. At the stock level, the sector scores among the weakest, and it is pulled down further by CVX which has been an awful chart. At the Industry level, Energy Equipment and Services, representing HAL, SLB and BKR has been the biggest laggard, trailing the S&P 500 by >36% over the past 12 months. At the sub-Industry level, the only bright spot has been the Oil Storage and Transport space, where KMI, OKE, TRGP and WMB are among the best charts in the sector.
Economic and Policy Drivers
The Energy Sector price bounced in July on optimism that Donald Trump will regain the presidency. 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.
The switch to dovish Fed. policy has potential to rejuvenate the Energy sector as lowering interest rates could potentially spur capital investment. However, given the competitive race for the presidency at this point, it is just as likely that key Biden administration policies like the Inflation Reduction Act of 2022 and the Infrastructure Investment and Jobs Act will continue to be promoted. Those policies attempt to curb methane emissions and to expand infrastructure and tax credits for EV’s which contribute to secular headwinds for the sector.
Continuing fighting in the Middle East has not provided any boon to prices despite 11 months of combat involving many major players in the region.
We do think that if Candidate Trump gains in the polls, the XLE will likely rise as well, but that’s not an outcome we are willing to bet on at the start of the month given the state of our indicators for the Sector.
In Conclusion
Despite some rotation away from Mega Cap. Growth, we haven’t seen any sustained benefits to XLE in the short or intermediate term. Our Elev8 Sector Rotation Model Portfolio starts off September with a zero-weight allocation to XLE leaving us 3.56% BELOW the benchmark S&P 500.
Chart | XLE Technicals
- XLE 12-month, daily price (200-day m.a. | Relative to S&P 500 |MACD | RSI)
- Price continues below downtrend resistance while oscillators like RSI and MACD have failed to show any buying enthusiasm
XLE Relative Performance | |XLE Industry Relative Performance | XLE Sub-Industry Relative Performance | 1yr
Data sourced from FactSet Data Systems
