Equity-based energy exchange traded funds, namely the popular Energy Select Sector SPDR (NYSEArca: XLE) and the rival Vanguard Energy ETF (NYSEArca: VDE), traded higher last year but were market laggards.
That laggard status has carried over into 2014, forcing XLE, the largest energy sector ETF, into a critical technical juncture. All that for XLE after recently trading to its highest levels since 2007.
“The Dow and S&P 500 are near all-time highs, energy stocks are attempting to join them. XLE recently hit its 2007 highs and backed off a little. The decline now has XLE testing support of this 6-year rising channel,” said technical analyst Chris Kimble of Kimble Charting Solutions.
“Important test for energy stocks right now? Yes! Support and resistance are coming together for XLE, how it handles this support/resistance test in the next couple of weeks could tell us a bundle about the future of energy stocks 6 months from now!,” added Kimble.
Pivotal to the fortunes of ETFs such as XLE and VDE are Dow components Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX), the two largest U.S. oil companies. Those stocks combine for almost 29% of XLE’s weight. With a weight of 15.7%, Exxon commands at least double the weight of 45 of XLE’s other 46 holdings with Chevron being the outlier.
Entering Tuesday’s session, Exxon and Chevron were saddled with year-to-date losses of about 10%, stumbles that have also pressured the SPDR Dow Jones Industrial Average ETF (NYSEArca: DIA) where Chevron is the sixth-largest holding. [Energy ETFs Stumble to Start 2014]
Energy stocks and ETFs like XLE and VDE have also disappointed even as natural gas prices have soared. Natural gas is the best performing commodity in the S&P GSCI Commodity Index this year, an important factoid because Exxon and friends have previously been criticized for being too “gassy” in their output levels. In fact, Exxon Mobil is the largest natural gas producer in the U.S. [ETFs Left Behind as Nat Gas Soars]
XLE needs to hold support in the $83-$84 area or risk significant price decay, a scenario that would increase the allure of the UltraShort Oil & Gas ProShares (NYSEArca: DUG) and the Direxion Daily Energy Bear 3X Shares (NYSEArca: ERY).
