Monday, April 20, 2015


The Energy Sector Select SPDR (XLE) may have ended the day down on Friday, but it still managed a feat unimaginable during the worst days of last year’s sell-off in crude, outperforming the S&P 500 for five straight weeks with positive returns in four of those five weeks.  With XLE now up 10.5% since March 16th compared to a relatively anemic 1.35% for the S&P, we were more than a little surprised how few energy stocks were making our lists of top Behavioral Quant Scores despite the strong outperformance by the energy sector.  While there has been a strong energy presence on our ETFG Global Equity Indices for some time, only one fund makes the top 25 Behavioral list with the SPDR S&P Oil & Gas Equipment & Services ETF (XES) coming in at number 10.  So pardon our pun but this week we’re going to drill down further into the action to determine whether we are still in the early stages of an oil rally or whether the well has already run dry.

Unlike the doom and gloom reporting that seems to dominate the broad markets, it’s been nothing but positive news for the energy sector for some time now.  The likely (or easiest to identify) culprits behind the strong price action for energy stocks over the last two weeks were the announcement of the largest merger to hit the energy sector since 1998 with Royal Dutch Shell acquiring BG Group for 47 billion pounds as well as Citi’s release of a revised outlook last week for the energy sector where they anticipate prices stabilizing in the second half of 2015 with Brent crude trading in a range between $60 and $70 per barrel.  While megamergers are always good for stoking the speculative fires (not so much on delivering value to shareholders), concerns over whether Shell can maintain its current dividends have weighed on the stock.  Far be it from us to doubt wisdom of Citi but the Brent spot price was already trading just under $60 when they issued their report which only seems to confirm the rising trend that began in mid-March.  With the U.S. Energy Information Administration reporting last week that crude stocks have risen nearly 25% since the start of the year, we might be waiting sometime before the much hyped drop in production arrives.

The more likely culprit behind the strong price action in crude oil and the energy ETF market is the weakening of the U.S. dollar.  The rally in oil prices wasn’t the only major event on March 16th, it also represented the high water mark for the U.S. dollar where the spot price closed over a $100 before retreating as the sea of later comer money began considering comments from the FOMC that the much anticipated rate hike cycle might be much gentler and shallower than previously thought.

While the PowerShares DB US Dollar Bullish Fund (UUP) has only seen a slight $10 million outflow since then, that represents a major change in momentum considering the $352 million the fund has brought in over the last three months.  That massive momentum shift caused by uncertainty over Fed policy can be easily observed through the ETFG Fund Flows Report where March saw major inflows into the energy and natural resource sectors which has been confirmed by the month-to-date fund flows where XLE is the only sector SPDR to show strong inflows in April.  Although the rest of the list may still be dominated by currency hedged international funds, the amount going into unhedged products has begun to expand as investors contemplate whether the powerful move by the U.S. dollar has become overextended.

Investors looking for quick profits have helped push the assets of the ProShares Ultra Oil & Gas (DIG) up 10% in the last month, but those using leveraged funds for bullish or bearish confirmation signals will have to continue to wait as that 10% increase is only about on par with the one month increase for XLE and the Vanguard Energy Index Fund (VDE) and pales when compared to the 65% increase in assets for the First Trust Energy AlphaDEX Fund (FXN).  It’s not hard to see why investors have come to love FXN; while the strong interest in energy funds has pushed their behavioral scores higher, rising prices dinged their previously strong fundamental scores as investor hopes for future earnings overcome their concerns over the weak energy market in the present.  Both XLE and VDE trade for P/E multiples over 25 while FXN trades at a more reasonable 14.36 (and SPY is at 18.51) making it the most reasonably priced broad energy sector fund we track and subsequently giving it a higher ETFG Reward ranking than either of it’s bigger rivals.

What is our highest ranking fund?  Why none other than XES coming in with a Reward Score of 9.72 thanks to the strong increase in the behavioral score and a fundamental score that while off from its recent highs is still well above those for the broader sector funds like XLE.  Being a broad sector fund is what’s kept XLE off our behavioral list; over the last month its score has risen 24% compared to the 80%-100% increase for most of the funds in the top 25 including a 122% increase for XES as it comes back from the investor graveyard.  So overall, investors may still be choosing hope over reality in the energy sector but those watching the dollar and market valuations may be setting up the next phase of the rally.

Thank you for reading ETF Global Perspectives!

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.