The past several trading sessions have shown an increased propensity for traders to "allocate or rotate" funds into commodity and natural resource stocks. Those gains were no starker than during Friday's trading session, when the S&P Energy Sector (XLE) was higher by +3.23% versus the S&P 500's (SPY) +.54% gain. This circumstance however, hasn't been the norm in recent months, but perhaps it is the beginning of a larger rotation move out of those sectors that have done relative well off the S&P 500 March 9th low such as the S&P Technology Sector (XLK). Time will tell as they say, but the technicals behind the XLE/SPY ratio are setting up reasonably well for a larger XLE move higher against SPY.
The daily XLE/SPY chart is clearly in an uptrend, with the 600-day moving avearge being the fulcrum point of this rally. Once again this level is being tested and arguably given yesterday's sharp move in XLE vs. SPY...it has begun to show its technical merit. The question is whether there is sufficient buying pressure to push the ratio above its 200-day moving aveage that would "seal the deal" for perhaps another run at the highs near .70. In our opinion, there is sufficient cause to believe this will be the case given the 40-day stochastic is plumbing down to near-oversold levels, which in the past has been a bullish harbinger of rallies.
Given these circumstances, and given the XLE is now clearly breaking out above its 100-day moving average - we would think that if long positions were to be added at this juncture, then Energy names would be at the forefront of any list.
Good luck and good trading,
Richard
