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Is the Energy Rally Over?

Last week, crude oil futures fell $11, the popular XLE ETF plunged 17%, and many energy stocks crashed. Is this the end of the energy rally?

First, let us look at some data from last week. We start with a drop of $11 in crude oil futures:

It does not appear that the parabolic uptrend on the weekly chart can be affected much by an $11 weekly loss. For the week ending April 1, 2022, crude oil fell $14.6 and that did not signal an end to the uptrend. However, at some point, a large loss will be associated with a change in trend.

In my opinion, there is verbal intervention in the market using the “recession” word to cool commodities markets and support growth stocks. This is terrible politics that can cause more harm. The inflation in food and energy is not related to an overheated economy but to other factors, including confusing pandemic policies, a senseless prolonged momentary expansion, and a major geopolitical conflict the kind we have not seen in many decades. Therefore, no one knows the direction of the trend, although the loss in oil caused a crash in many stocks. Below is a list of S&P 500 stocks that lost more than 15% last week (ending June 17, 2022).

All of the above stocks operate in energy and commodities markets. An example is Chevron Corp (CVX), a Dow 30 component, that fell 15.4% last week.

in its long history since 1950, CVX has fallen more than 15% in a week twice in the past, the first time during the 2008 bear market, and the other time during the 2020 pandemic crash. Markets have become riskier since the turn of this century and investors in equities can face large losses in a short period.

Our weekly long-short algorithm was short the stock in the last two weeks. The large gain of 13.5% in short CVX contributed to a gain of about 2.6% for the week.

A stock market where profits come from shorting is a dangerous place for investors. The algorithm was lucky but many investors lost a lot of money with longs.

The popular XLE ETF fell 17.2% last week.

Also in this case, since the XLE’s inception in 1999, all three previous occasions of a drop larger than 17% were during the 2008 bear market and the 2020 pandemic crash.

It is premature to declare an end to the uptrend in XLE but the odds have increased after last week’s drop. Everything is odds and probabilities, in most cases subjective.

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Disclaimer:  No part of the analysis in this blog constitutes a trade recommendation. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.

Charting and backtesting program: Amibroker. Data provider: Norgate Data