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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