Energy Sector Looks Promising

US energy equities have seen a large decline (almost 20%) in the last month and appear poised for a bounce soon (I believe it has potential to be the yearly cycle low for the index). XLE is clearly oversold on a daily basis . Combined that with a bounce off a downtrend line connecting recent lows and an affinity for this index to find support at $50 (also a nice round number which humans seem to like), makes the weight of the evidence suggests a bounce is in the cards [note - I wrote this post this morning and XLE has indeed rallied hard and closed at $52. Of course follow is needed to see if today was indeed a local bottom].

Whether this leads to upside range expansion above 62 is to be seen, but if we are still in this super charged / super speed cyclical bull market then I expect that to be the case. 62 is an important price and it looks like it could move substantially higher if it can break above this level.

Remember that Energy is a late cycle performer (it topped 9 months after the October 2007 S&P 500 top and went 15% higher after that Oct 07 broad market top. In the previous bull market it also topped in mid 2001 over a year after the broad market topped in early 2000) . This means that we could see rotation into Energy & Material stocks later this year and could make Energy an out performer until the end of this cyclical bull market.

XLE - 2 year daily chart

Looking at the longer term (see chart below), XLE has potential stronger support in the 43 range, which was both the July 2009 intermediate low as well as the point on the chart where the long term support connecting the last two bear markets lows.

Also note that the market was range bound between $50 to $62 in 2006 into the beginning of 2007 before breaking out and ultimately topping at $90 in May 2008. Furthermore after this breakout $62 served as support during the intermediate lows in Aug 07 and Jan 08.

XLE - 15 year weekly chart

I would also like to look at the chart below of the performance comparison between the SPY (S&P 500 proxy) and XLE. You will clearly see that energy (yellow line) strongly out performed the S&P (purple line) over the last market cycle. In fact XLE did not even come down and test its 2001 high during the 2008 bear market. This is in stark contrast to the S&P which breached its 2003 bear market low in 2008/2009.

I would dare to say that XLE is in a secular bull market (I believe this is tied to the rise of emerging markets), whereas S&P is most certainly in a secular bear market. Clearly over two cycles energy has made a series of higher highs and higher lows. Very impressive.

XLE vs SPY - 15 year daily chart

Until next time...