Several factors have contributed to the recent rise in energy and commodity prices. Recent production cuts announced by one of the world’s largest crude exporters (Saudi Arabia), the continuing war in Ukraine-Russia, and expectations for a soft landing in the U.S. economy have led to higher WTI crude oil prices trading and boosted the demand for energy stocks.
However, a sustainable rise in crude oil and commodity prices becomes troublesome as this warns of continued high inflation, creating a dilemma for the Fed as it seeks to curb inflationary pressures via its interest rate hiking policy. Higher inflation can lead to higher interest rates, hurting stocks, specifically economically sensitive and growth-related securities.
The West Texas Intermediate crude futures for September delivery closed at 88.85 a barrel, the highest settlement for the year. Surging above 83.5-85 (Apr/Aug 2023 highs) confirms a technical breakout and suggests the next WTI rally toward 93.5-97.5 (Aug, Oct, and Nov 2022 highs, 50% retracement from Jun 2022-May 2023 decline, and the Mar/Jun 2022 primary downtrend) and above 101-103.5 (61.8% retracement, the late-Jul 2022 highs, and breakout projection). Initial support is 83.5-85 (Aug 2023 breakout) and below this to 80 (50-day ma) and 76.5-77.5 (200-day ma and Aug 2023 lows).
The S&P 500 Energy sector (XLE) challenges pivotal resistance at 91.5-92 (Nov 2022/Jan 2023 highs). XLE is trading at moderately overbought levels, suggesting a near-term pullback is possible. Nonetheless, a breakout to new all-time highs suggests 18-29 points or a target at 110 (intermediate-term) and 121 (longer-term). The initial support is 89-90 (9/1/23 gap-up). The 50-day ma (87) and 200-day ma (84) offer intermediate-term support.
With Crude Oil and commodity prices surging, XLE has reclaimed its top spot and is now the undisputed market leader among the S&P 500’s 11 major sectors. XLE has skyrocketed 15.02% over the past three months, exceeding the returns of the other two top performers – Communication Services (XLC +5.33%) and Consumer Discretionary (LXY +4.67%).
It is a significant turnaround from the past spring when XLE was one of the poorest performing S&P sectors, pulled down by the fears of a slowing global economy and lackluster energy demand. Energy stocks are commodities-related assets and, as such, tend to be influenced by the boom-and-bust cycles of the global economy.
From a year-to-date perspective, the S&P 500 Energy Sector (XLE) has moved up to the fourth best performing S&P sectors with gains of 7.53%, a promising start to the last quarter of the year. Oil Equipment and Services and Exploration and Production sectors have witnessed explosive returns over the past three months.
The enclosed 8-week Relative Rotation Graph (RRG) studies of the 11 major S&P sectors by market cap and equal weight showed compelling evidence of rotations back into the S&P Energy sector, as evidenced by XLE returning to the Leading Quadrant. Enclosed is
a scan of the large-cap Energy stocks ranked by SCTR. Focus on Energy names with large technical bases, trading above the 50-day and 200-day moving averages, and rising SCTR trends.
Comments