Ahead of Big Earnings, Energy ETFs Show Vulnerability

Next week is an important one for the energy sector as some of the group’s biggest names step into the earnings confessional. With a big week looming for oil stocks, at least one technical analyst sees potential downside for the Energy Select Sector SPDR (NYSEArca: XLE), the largest energy ETF by assets.

“XLE has failed at price resistance from the May peak. Should that remain so, then we would look for a return to the June low at $76.02. The relative chart versus the S&P 500 has been weak since February and that downtrend looks to be reasserting. The sector is underperforming and we suggest playing the downside,” wrote technical analyst Tarquin Coe of The Coe Report.

Coe is correct that XLE has lagged the S&P 500 this year. So has the rival Vanguard Energy ETF (NYSEArca: VDE). Those two ETFs are up an average of 17.2%, but the S&P 500 is up nearly 20%. [A Look at Vanguard’s Energy ETF]

Next week could make or break those energy ETFs in the near-term. Starting Tuesday with Occidental Petroleum (NYSE: OXY) four of XLE’s five largest holdings deliver second-quarter results. The others are ConocoPhillips (NYSE: COP) and Dow components Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX). That quartet combines for almost 40% of XLE’s weight. [Is it Time to get Into Energy ETFs?]

At the end of the second quarter, Exxon and Chevron combined for 36.4% of VDE’s weight. Throw in Occidental and ConocoPhillips, and the four stocks combine for nearly 45% of the fund’s weight.

In his note, Coe recommend three energy stocks as short trades, oil services firm McDermott International (NYSE: MDR), coal giant Peabody (NYSE: BTU) and refiner Valero (NYSE: VLO). Valero and Peabody combine for 2% of XLE’s weight, but McDermott is not a member of the ETF’s 45-stock lineup.