The energy sector is struggling as oil prices slide, a scenario that is pressuring equity-based exchange traded funds such as the Energy Select Sector SPDR (NYSEArca: XLE). The seventh-largest sector weight in the S&P 500 is the worst-performing group in the benchmark U.S. equity index this year, giving investors little reason to cheer.
Energy is one of a small amount of sectors that still trades at a noticeable discount relative to long-term averages. Additionally, the energy sector is usually among one of the largest sector weights in value ETFs, underscoring the point that the group is attractively valued relative to some defensive sectors, which trade at lofty multiples.
Some analysts believe the energy sector’s growth prospects remain attractive following the dip to start 2017. Fortunately for energy bulls, XLE and other energy ETFs are showing improved technical health.
XLE “now appears to be breaking its four-month declining trend to the upside. It also scored a bullish price reversal on longer-term charts, after opening two weeks ago at a new low for its slide but ending that week with a very strong gain. It was a sign that something important in the market’s perception of the sector happened that week—and it was bullish,” reports Michael Kahn for Barron’s.
Energy’s earnings drag is evaporating as S&P 500 energy earnings are expected to be only slightly negative for the fourth quarter and offer significant upside potential moving forward in 2017.
Notable is the fact that February marks the start of a multi-month stretch that is considered the seasonally strong period for the energy sector.
XLE’s rivals include the Fidelity MSCI Energy Index ETF (NYSEArca: FENY) and the Vanguard Energy ETF (NYSEArca: VDE), which are two of the least expensive energy sector ETFs.
However, there are other factors to consider, chief among them that the technical outlook for XLE is not 100% convincing.
“There is one technical negative staring at us. Barring an immediate sharp jump higher, the ETF is about to experience a bearish moving-average cross: The 50-day average could drop below the 200-day average. It’s what chart watchers call a ‘black cross’ or ‘death cross,’ and it’s supposed to tell us that the overall trend is changing from up to down, although it is not a guarantee,” according to Barron’s regarding XLE.
For more information on the oil market, visit our oil category.