Proceed With Extreme Caution

June 22, 2022  |  Michael Reilly

Heavyweight boxer Mike Tyson was famous for saying, “Everyone has a plan until they get punched in the mouth.”

My Question: Did Energy just get punched in the mouth? Because it sure looks that way.

Until now, the Energy sector has been immune to the rout hitting the rest of the market. 

Energy has been the last man standing – the only sector with positive returns in 2022 and the only sector propping up an otherwise weak stock market.

But it looks like the headlines calling for a possible global recession may have caught up with the strongest sector of 2022 as well…

The large-cap sector SPDR ETF (XLE) is coming off one of its worst weeks in history and for the first time in over a year, momentum is oversold. 

If we exclude the COVID crash from 2020 (an event that caused oil futures to trade below zero), this is the worst weekly performance from energy stocks since 2008, and the second-worst week in the fund’s nearly 24-year history.

And last week, in a continued sign of weakness, XLE broke through its 50-day MVA, finding no support, finally closing out the week at $73.49 – falling far south of its June 17 high of $93.10.

The last seven trading days saw Energy stagger and fall a whopping -21.40% from its June 17, 2022 highs. 

The question is can Energy rebound from that punch to the jaw that’s already knocked out every other sector of the S&P 500?

Obviously, I don’t know the answer… and I can assure you, neither does anybody else. 

I’ll say this, I think a move back above the 50-day MVA would go a long way in reassuring investors that the party isn’t over just yet for Energy stocks. 

Investors long on Energy would be wise to keep a keen eye on the long-term chart of XLE for insight as to the future direction of XLE.

You see, this Energy sector ETF has been here before – twice. And on both occasions, it failed miserably.

That’s important information because XLE is once again bumping up against the same price that formed resistance in 2008 and 2014.

And just like in 2008 and 2014, XLE is again being turned away at this level.

Only time will tell if buyers have the conviction to push energy stocks higher this time. 

If they do, it will be in the face of deteriorating economic conditions, higher rates, and a potential global recession.

I don’t know if Energy can repair last week’s damage, but I do know that these previous levels of long-term resistance should be respected. 

And until further notice, Energy, like the rest of the market, is now guilty until proven innocent.

Proceed with extreme caution. 

Until next time, invest wisely…

P.S. To learn more about Rowe Wealth can help you weather the current turbulent markets, you can schedule a free 1-hour consultation here.

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