Just a little less than two months ago, it looked like the Energy Select Sector SPDR ETF (NYSEARCA:XLE) was in full-blown rally mode, driven by constituents like Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX). From a low of $61.80 in late August to a high of $68.93 in early October, the 11.5% swing from XLE stock hinted at a new bullish paradigm.
The past couple of weeks haven’t been quite as hot for the energy ETF, however. The 7% slide back to the current price near $67 not only seemingly quells the rally, but hints at another pullback.
If you’re a true long-term investor though, and you see sector-based ETFs like the Energy SPDR as an effective, simple way to tap into the bigger trends that transcend the market’s typical volatility, you might want to stick with your XLE stock. Believe it or not, the energy sector really is in the midst of a turn-around. Oil prices really are poised to remain at prices healthy enough to keep the likes of Chevron and Exxon Mobil profitable.
XLE Getting Back on Track
There’s no denying it — 2014 and 2015 were miserable years for the oil and gas industry. The iShares Dow Jones US Energy Sector ETF (NYSEARCA:IYE), along with the aforementioned XLE stock, each lost nearly 50% of their value between their 2014 high and their early-2016 low. That’s in step with the sector’s earnings implosion. The S&P 500 Energy Sector Index, which until then had been earning about $11 per share (per quarter), ultimately swung to a loss of $8.20 per share for the fourth quarter of 2015.
A funny thing happened by the third quarter of 2016, however. Although still nowhere near the profitability of its pre-2014 glory days, the sector swung back to a profit. It has continued to widen its profit margins in step with the slow-but-sure rebound in the price of oil.
The graphic below tells the tale. It’s not pretty, and not what it used to be. But trajectory-wise, the industry is moving in the right direction. (The pink arrows point to where the data is as of the end of the third quarter. Everything to the right of the arrows is an estimate.)
Click to EnlargeCrude oil prices are also toying with a key technical catalyst many traders are ignoring.
Granted, you have to take a pretty big step back to put it in perspective. This long-term weekly chart of oil prices illustrates the implosion from two years ago. It also maps the steady (if choppy) recovery in the meantime. Right now oil prices are dancing with a major resistance line (pink) as well as a minor horizontal ceiling (dashed red).
Both are right around 52.60%. If crude prices can clear that hurdle — and it looks like it’s trying to do exactly that — there’s technically little else to hold it back from a bigger, more prolonged move.
Click to Enlarge
Zooming into a daily chart allows for a more detailed look, underscoring how at the very least, crude prices are above their moving average lines … all of them. The daily chart also, albeit loosely, offers hints of an upside-down head-and-shoulders pattern. If the neckline around $52 fails to hold the effort back, the end result is often a slingshot-driven rally. The march towards greater profitability certainly helps investors justify higher highs.
In between here and there though, an inch may as well be a mile.
Looking Ahead for XLE Stock
Click to EnlargeWith all of that as the backdrop, the make-or-break level for XLE stock has become pretty clear. It’s going to take a move above $69 for the energy SPDR ETF to convincingly say it’s shrugged off the bulk of the problems that had been holding it back.
That number wasn’t pulled out of a hat. That’s where the energy SPDR ETF bumped into a ceiling several times in late September and early October. With a mental line in the sand drawn at that level, the next test of it could be telling– and catalytic in itself. Such a move would also most likely be matched by crude oil’s move above its resistance at $52.60.
The hardest part is waiting to see if the market’s finally going to pull the trigger this time. But it’s certainly worth watching and waiting on.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.