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Time for an Energy Comeback During Spring Switch


Energy may begin to lead once least relative to consumer stocks in the near-term.

Switching to the outfield was the best break I ever got.
-- Al Kaline

Following the Summer Crash, Fall Melt-Up, and Winter Resolution calls, I released earlier this week my idea for the "Spring Switch" (see Stock Market Trends: From Winter Resolution to Spring Switch), which is the concept that money begins to rotate out of "risk-free"/safe-haven trades and into more risk-sensitive areas of the investable landscape.

Energy as a sector tends to be quite cyclical and more volatile than many other areas of the market. To that end, there could be a "switch" coming in the preference investors have for energy stocks relative to consumer stocks in the near term.

Take a look below at the price ratio of the Energy Select Sector SPDR ETF (XLE) relative to the Consumer Discretionary Select Sector SPDR ETF (XLY). As a reminder, a rising price ratio means the numerator/XLE is outperforming (up more/down less) the denominator/XLY.

What's been remarkable about rising oil prices is that in the face of added costs to the consumer, the discretionary sector has outperformed energy on average in a meaningful way since late March of last year.

The relationship between energy and discretionary now appears to be hitting a bottom last hit in the middle of 2010. Mean reversion could kick in now as energy stocks begin to take on a leadership role following what I would argue has been a mini-correction in emerging economies.

Time for a comeback in energy?

Twitter: @pensionpartners
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No positions in stocks mentioned.

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