A “Crocodile Jaw” Has Opened Up In The Energy Sector

A “Crocodile Jaw” Has Opened Up In The Energy Sector
Luke Suddards

about 1 year ago1 min

Mentioned in story

The Energy Select Sector SPDR ETF (ticker: XLE; expense ratio: 0.1%) seemed to be on a winning streak recently (orange line), trading above its June highs and peaking just below $100. However, something concerning was happening in the meantime – even as XLE was moving higher, Brent oil has been consistently moving lower. This has opened up what I like to call a “crocodile jaw” style divergence between the two assets, which usually trade in tandem. And this seems unsustainable.

See, the fall in the price of Brent crude suggests that investors are anticipating a global recession that will slow economic activity and dampen demand for oil, despite the prospect of a full reopening of the Chinese economy. But the energy sector ETF was rising like there was no slowdown in sight. That may be changing.

More recently, sales of energy stocks have been outpacing buys by a factor of 6 – the most aggressive selling in five months, according to a Goldman Sachs trading desk report from November 25th. Historically, when a significant divergence between the price of Brent oil and XLE has opened up, it has always been closed by a fall in XLE. Will history repeat or will this time be different? XLE has provided solid gains in recent months, sure, and could do so again, but you might want to wait for a lower price before taking a shot on this.

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