Friday, February 22, 2013

Do you really think Bernanke is about to take away the punch bowl sending the economy into cold turkey withdrawal spasms?  Looking at the action in the oil pits you would think Esther George is calling the shots on the Fed board.  Maybe oil got hit on that higher than expected inventory report but those have become commonplace since the fracking boom made the US an oil producer again.  Quant is unmoved by all the noise as the SPDR S&P Oil & Gas Exploration & Production Fund (XOP) is in 1st place today, familiar territory as it has ranked in the top 5 since January 7th.  Its broader sister, the SPDR Energy Select Sector Fund (XLE), confirms Quant’s pro energy message with its 4th place rank, also familiar territory as it has been in the top 10 for most of the past month.

Notwithstanding the last two days, each fund is still outperforming the S&P500 year to date.  The lower risk XLE has held up a little better in the selloff but Quant favors XOP despite its higher 4.61 Red Diamond Risk Rating.  That’s the highest in today’s top 10 which still averages below 4, as do today’s top 25 and 100 funds.  A look at each constituent list gives a feel for that risk where XLE holds more recognizable names than XOP.   You won’t be filling your tank from Delek US Holdings which is XOP’s top holding with a 1.88% weight but they probably sell to ExxonMobil which tops XLE’s list at 17.26% of AUM.  Both funds get decent Fundamental Scores where XOP’s 80.4 beats XLE’s 75.1.  The two share similar mid 80s Global Theme Scores but XOP’s 72 constituents gives it a better diversification score than XLE with 44 which leads to a slightly higher Quality Score.  Although both are outperforming the market, their mid 60s technical scores are good but nothing special.  It’s their sentiment scores that account for their high ranks.  Both have high volatility and put/call scores and their short interest scores are each in their 99th percentile where they have been throughout the rally.  So if the market has further to fall these two have some embedded buying pressure as those shorts will need to be covered.

If the market does have further to fall, the historically high correlation between today’s asset classes and sectors says risk off will hurt these funds.  A weakening economy is also correlated in most of our minds with lower oil prices.  However, those of us who sold cold drinks on the gas lines of the 70s know the Phillips curve has a poor empirical record.  Yes we can have a weak economy and high inflation and until Esther George becomes a household name don’t expect the Fed to turn off the firehouse.  All that liquidity needs to go somewhere and Quant thinks the oil pits will continue to absorb it.   Thank you for absorbing all that ETFGsm has to offer, we’ll have even more for you next week.  Have a nice weekend.

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