The Energy Select Sector SPDR (NYSEArca: XLE) is down more than 20% year-to-date, making it the worst performer among the nine sector SPDR exchange traded funds, but some market observers believe a bottom is close to being reached for the downtrodden energy sector.
There are reasons for investors to be cautious with volatile energy ETFs. Moreover, if oil prices falls to new lows and the shale industry is unable to turn a profit, the highly leveraged industry may find it harder to repay debt obligations. With the U.S. dollar strengthening and the Federal Reserve looking at tightening its monetary policy, the various U.S. market sectors and related exchange traded funds could behave differently in a strong USD environment.
Bright spots have been few and far between for equity-based energy exchange traded funds this year and for all the struggles the encountered by the sector, it still is not inexpensive relative to the S&P 500. In fact, the energy patch is downright pricey compared to the broader market. This after a spate of spending cuts that have not been met with widespread enthusiasm among investors. [Oil ETF Dividends Appear Safe…Sort Of]
Add to that, the energy sector is not inexpensive on valuation.
“Energy remains the most expensive due to falling net income margins – even though the XLE is down 15% in the past 12 months. Earnings in the sector have dropped along with energy prices,” reports Lawrence Lewithinn for Yahoo Finance.
Still, some analysts see a potential technical bounce for XLE.
“”I see a possible triple bottom here at around $60,” said AlphaShark Trading founder Andrew Keene, who was looking at a chart of the XLE. A triple bottom formation is when an asset falls to the same point three times and bounces. Technicians often view the pattern as the reversal of a long-term downtrend,” according to CNBC.
Profit expectations have fallen dramatically which in turn has pushed the sector’s P/E ratio much higher even as stock prices have declined, though P/Es have come off their highs and estimates appear to have stabilized,” according to AltaVista. Those falling earnings expectations explain why energy sector valuations are not declining to the point where the group appears cheap.
Energy Select Sector SPDR
