The hottest, most reliable trade of the year has recently turned into the most volatile. And that could spell trouble for investors who are seeking safety.
The ETF that tracks the energy sector, the XLE, was up 13 percent in the first half of the year. But it’s off 2percentin the last five trading sessions. However, Monday it had its biggest one day gain since mid- November, and it recently rebounded from a two-month low.
The sector had attracted investors seeking income, and as such, had come to be viewed by many as a “safety” sector.
So, with the recent volatility, is this “safety” sector suddenly dangerous?
According to Gina Sanchez, founder of Chantico Global, the XLE is going to have a tough time moving much higher. She said geopolitical tensions have kept oil prices relatively high, “but the fundamentals would suggest that oil should be lower.”
Lower oil prices, however, aren’t reflected in the analysts’ estimates for companies like Exxon Mobil and Chevron, said Sanchez. Those two companies alone make up 28 percent of the XLE.
“There’s still some bullishness in the analyst community regarding the oil companies,” said Sanchez, a CNBC contributor. “But oil prices themselves should probably drop. So the only way you’re going to see XLE continue to go up is if they continue to squeeze out huge margins because the actual input price is going to drop.”
Though energy remains one of the best-performing sectors in the entire S&P 500, Richard Ross, global technical strategist at Auerbach Grayson, believes its ETF will drop to $90 per share. The XLE closed at $97.46 on Monday.
(See: CNBC's Energy coverage)
Ross sees a bearish head-and-shoulders pattern forming in the beginning of June with a neckline at $98.37 per share. The XLE broke below that level just when it coincided with its 50-day moving average. This was the first time the ETF traded below its 50-day moving average since February.
“That’s a nice little initial sell signal,” said Ross, a “Talking Numbers” contributor. “And you can see [a] little air pocket down to the 200-day which comes in right at $90.”
But it’s the XLE’s six-year chart that gives Ross more justification for a $90 price target. He has three reasons thatpoint him to that level:
1. A multiyear uptrend line beginning from the XLE’s 2009 lows. It’s currently at $90.
2. A horizontal support level from its 2008 highs, also around $90.
3. The 50-week moving average is right now just about $90.
“I think that’s where we’re heading,” Ross said. “I do like energy – it’s a very strong trend. But I like it a lot better at $90 than I do right here. I would not touch it.”
To see the full discussion on the XLE, with Sanchez on the fundamentals and Ross on the technicals, watch the above video.