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Zacks Investment Ideas feature highlights: Select Sector SPDR Energy Fund, S&P 500 ETF, iShares Global Energy ETF, SPDR Financial ETF and SPDR Retail ETF

Zacks Equity Research

For Immediate Release

Chicago, IL – July 23, 2013 – Today, Zacks Investment Ideas feature highlights Features: Select Sector SPDR Energy Fund (XLE-Free Report), S&P 500 ETF (SPY-Free Report), iShares Global Energy ETF (IXC-Free Report), SPDR Financial ETF (XLF-Free Report) and SPDR Retail ETF (XRT-Free Report).

Playing the Contrarian with Energy

Sometimes, I like to play the contrarian.  A friend once told me nobody builds a statue to a crowd, and being a hero with your investments sometimes requires zigging when everyone is zagging.  The energy sector has been lagging the S&P 500. Its relative underperformance may present an opportunity for outperformance if you think sector returns mean revert over time.   

What is relative performance?

Relative performance measures the returns of a stock or sector against another stock, sector, or market index.  Relative performance is usually measured either by comparing returns over time or on a spread basis using a ratio of the assets being compared.  Institutional investors and hedge funds tend to focus more closely on relative performance than retail investors.

How much has the energy sector been lagging:

The ratio of the Select Sector SPDR Energy Fund (XLE-Free Report) to the S&P 500 ETF (SPY-Free Report) is trading near the lower end of its five year range.   The performance is even worse for the iShares Global Energy ETF (IXC-Free Report).  The ratio of the IXC to the SPY is trading at its lowest level since 2007 due to the outperformance of U.S. stocks relative to international equities.    

Between December 31 2012 and July 19 2013, SPY has posted a return of 18.8%, while the XLE has recorded a return of 17.2%.  The IXC is up only 6.8% and a clear laggard. Much of the energy sector's poor relative performance came in 2011 and 2012.  Investors have been more interested in financial and retail shares this year.   The SPDR Financial ETF (XLF-Free Report) and SPDR Retail ETF (XRT-Free Report) ETFS were up 27% and 29.6% respectively year to date through July 19.

Global energy demand has been slow and refiners pressured:

Energy shares have been pressured by slower global growth, especially the weaker tone of growth in the emerging world in places like China, India, and Brazil.   The International Energy Agency (:IEA) has global oil demand growing 1.1% this year to 90.8 mbd and 1.3% next year to 92.0 mbd. Political and social unrest in Egypt and Syria has not been a clear benefit to energy equities on a relative basis.

U.S. based refiners have been hurt by a narrowing of the WTI/Brent oil spread (higher input costs relative to output costs)  and the increased cost of blending credits for renewable fuels.  These factors are out in the open.

However, there are a few bright spots for the energy market:

All is not negative for the energy sector. Crude oil prices have been rising in recent weeks and are generally improving the outlook for company profits outside of the refining sector.   West Texas Intermediary has risen over $15/barrel since late June, while Brent prices are up around $8/barrel. Although some of the gain is being blamed on an unwinding of the Brent/WTI spread, there are fundamental drivers at work.

First, China’s apparent oil demand rose 4.8% m/m and 11.7% y/y in June to 9.99 mbd.   Chinese demand for oil may be starting to improve.  

Second, the glut of West Texas Intermediary crude oil in storage seems to be loosening with the recent draw in inventory.   In recent weeks, WTI inventories have fallen 27.1 mln barrels from their high. A decline this time of the year is normal, but the drop has been strong to the 5 year average.  Seasonally WTI inventories should be pressured into the late summer or early fall.

Third, U.S. refinery run rates have been hot. Refinery utilization was 92.8% at last measure and well above the 88.0% recorded at the same time last year.  Demand looks healthy.

Fourth, hot weather has helped to reduce natural gas inventories which stood about 1% below the five year average in the week ending July 12th.

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