Oil is one of the most volatile commodities. That’s certainly been the case this year and, predictably, that turbulence makes its way to equity-based ETFs, such as the Energy Select Sector SPDR Fund (NYSEArca: XLE).
In fact, XLE, the largest energy sector ETF, and rival funds have been all over the place in the second quarter. XLE is up almost 30% since April 1, making it one of the best-performing traditional sector funds over that span, but over the past week, the fund is lower by 6.50%, good for one of the worst showings among comparable funds during that period.
“Despite the energy sector’s gains this quarter, the stocks have pulled back from their highs earlier this month and are hovering on the cusp of a bear market—marked by a 20% fall from a recent peak,” reports Caitlin McCabe for the Wall Street Journal. “Oil prices have also retreated, and rising concerns surrounding an uptick in coronavirus infections threaten to potentially dent fuel demand again.”
There are lingering concerns over demand and the overall strength of the energy market. The demand outlook has weakened after more than 25,000 new coronavirus cases were reported on Saturday in the U.S. where over 2 million have now been infected. Meanwhile, China reported a spike in cases in Beijing where lockdown measures may be reinstated.
Expect More Gyrations
Goldman Sachs’ top stock strategist, David Kostin, has warned that energy will remain one sector to avoid despite posting the strongest returns since the market low in late March, CNBC reports. The strategist pointed to a fundamental headwind for oil is unlikely to change, highlighting a correction in crude prices potentially as deep as 20% in the near term.
“The simultaneous—and seemingly conflicting—milestones within the energy sector highlight just how quickly this year’s stock market can change. Such volatility across the market has made it difficult for investors to try to predict where stocks are headed next,” according to the Journal.
Some data points indicate sell-side analysts remain bullish on energy stocks, including some XLE components. Valuation may be one reason why. The recent sell-off may have opened up a potential buying opportunity for bargain hunters, especially in the oversold energy sector.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.