Well when I started this post on energy stocks early this morning while I waited to order the new iPhone (because it’s time to admit that I’m old and I like the larger icons and easier operating system) I had a very different conclusion in mind. Since our last post on Tuesday, energy stocks had begun to make their stand around as part of a larger adjustment in investor attitudes that I’m sure according to CNBC is due to the President’s fight against ISIS, Scotland, Ukraine, government manipulation, etc. But after today’s action, we remain of the opinion that any near-term bounce should be used as an opportunity to sell out.
You can see it clearly in this XLE chart for 9/10 and 9/11 when buyers stepped in on Wednesday after the European close and by late in the day to help XLE move off a low of $93.81 to within spitting distance of its starting point. And on 9/11, XLE opened sharply lower only to repeat the same feat as West Texas crude oil and Brent both put in their first positive day since September 3rd. Since June 19th, WTIC has dropped 12.2% while Brent is off over 14.16% and brief periods where prices have tried to base were met with additional selling.
And today the story turned back to one of selling as the European close has come and gone and no new buyers have chosen to step up to the plate. What’s to blame? Could it be the next round of sanctions on Russian energy firms? RSX is holding relatively steady and slightly positive as of post time while EFA and EZU are showing slight losses and improving relative momentum compared to SPY as the tide seems to turn for Uncle Buck. Could it be the steepening yield curve as the ten year treasury yield spikes above 2.6% and the spread between 2 and 10 continued to widen? Investors do seem to have decided (for now) that interest rates will rise sooner rather than later and that expectation of more stringent efforts to fight inflation could be taking their toll on commodity prices. The five year breakeven has fallen steadily from 1.97% on May 22nd to 1.69% on 9/10 as the TIPS sell-off has pushed the 5 year TIPS constant maturity yield back into positive territory.
At the end of the day, the energy sell-off can be attributed to any number of factors but the most important to keep an eye on is the broader market. Equities are down across the board and there’s enough literature documenting that momentum does persist. Winners continue to win and losers continue to lose and given the amount of weakness in energy stocks over the last few months, their under performance isn’t surprising.
Next stop for XLE, $93 and let’s see if the bounce can give holders another opportunity to sell-out.