Potential rotation from energy to banks


Energy stocks were explosive the last two months, but things may be changing in June.

The closely watched and heavily traded SPDR Energy ETF (XLE) probed a new multiyear high two weeks ago, but was unable to hold it. It’s fallen as crude oil futures (@CL) sank their lowest levels since the first half of April. Monday’s price action was also potentially bearish, with XLE dropping from early highs while the broader S&P 500 mostly held its ground.

The opposite thing seems to be happening in banks — especially smaller lenders. The chart below shows two-day moves for the S&P Regional Bank ETF (KRE) vs. XLE. Notice the sharp divergence of XLE getting hammered shortly after the open Monday morning, while buyers trickled into KRE throughout the session.

2-day chart comparing SPDR Energy Fund (XLE) vs S&P Regional Bank (KRE)

Even if investors aren’t selling one directly to buy the other, it’s worth comparing the two sectors as a new month gets underway. Readers of Market Insights learned the positives in energy some time ago: renewed sanctions on Iran, limited OPEC supply, a strong global economy and impressive gains by domestic drillers. But many of those realities seem to be priced in. Now traders may be more concerned about rising inventories and uncertainty heading into the next OPEC meeting on June 22. That’s especially true if they’ve been listening to Russia Energy Minister Alexander Novak.1

In contrast, regional banks won a big victory on Capitol Hill last month when lawmakers eased rules on lenders with less than $250 billion of assets. (Bigger institutions reportedly failed to get a $500 billion threshold.) Industry watchers are already predicting the easier rules will drive consolidation among smaller banks.2

The forward calendar for banks may also be more positive with the Federal Reserve expected to raise interest rates at its next meeting on June 13. There’s also been a stream of positive economic news like strong non-farm payrolls, low unemployment and improving industrial numbers.

In conclusion this isn’t a trade recommendation and everyone needs to do their own homework. But good news may be priced into energy, with a less certain future. And, bullish developments may still be in the process of unfolding for banks.

1. Reuters: Oil output could return to October 2016 level, says Russia’s Novak. 5/26/18.

2. CNBC: House votes to ease bank rules, and Trump says he will sign the bill. Reuters: Small banks trump Wall Street on Dodd-Frank rewrite. 5/22/18. TheStreet: Congress May Have Just Set in Motion a Huge Banking Industry Merger Wave. 5/23/18.

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David Russell is VP of Market Intelligence at TradeStation Group. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.