Energy and Financials are both large sectoral components of the S&P500. Yet the two have diverged immensely over the last 2 years. Not since the technology bust at the start of the decade have any two sectors diverged so much from each other, and from the composite S&P500 index.
XLE is an exchanged-traded fund for the Energy sector, while XLF is the equivalent for the Financial sector. First, let us view a two-year chart :
Energy has outperformed the S&P500 by an equal margin that Financials have lagged the S&P500 by. Next, we can view a five-year chart :
While Financials only began to fall away in 2007, Energy has gone so high above the composite market that it reminds one of the technology bubble of the late 1990s.
It seems quite obvious here that while it is impossible to identify the exact top of the Energy run, or the exact bottom of the Financials correction, it would be very prudent to sell any existing holdings in Energy (or even short Energy if you have the appetite) and rotate the proceeds into Financials. The gap could widen in the short term, but rarely do two sectors reach such extreme disparities that make a profitable trade so obvious.
Good idea... would not have thought of that
Posted by: brokerdavelhr | April 22, 2008 at 01:28 PM
This is a classic STAGFLATION.
The most recent bout of Stagflation ended with a massive run up in rates.
Posted by: jeffolie | April 22, 2008 at 04:40 PM
jeffolie,
To the extent that there is stagflation, it started in 2008.
2004, 2005, 2006, etc. had neither stagnation nor inflation.
Posted by: GK | April 22, 2008 at 04:45 PM
Another view is that the Fed's inflationary monetary policies of the past six months have turned the dollar into a joke. The results are what you see here in the food and oil markets. Turning dollars into physical things of value.
We've been watching a dollar collapse in progress for months.
Posted by: Cervus | April 22, 2008 at 07:46 PM
The prices in the food and oil markets are being pushed more by supply and demand issues...and speculation.
There are severe food shortages developing throughout the world, not in just the US. And it is well documented that it is caused by supply problems.
As far as the dollar's exchange rate is concerned in all of this, the Fed hasn't inflated the dollar supply so much as demand for existing dollars has just dropped. For every dollar the Fed extends over the counter for helping banks (and now non-banks) liquidity problems, it quietly takes the same amount out of circulation by selling T-bills it has.
And the Euro is in more demand because interest rates are higher for Euro-denominated debt. Thus the velocity mis-match between those two (and some others) currencies are simply being reflected in the exchange rate.
Sorry if I appear as a terminology Nazi, but 'inflationary' to me in the context of a monetary authority's actions is defined as 'printing too much money'. The Fed is doing a lot of things, but that isn't one of them, technically.
Posted by: Zyndryl | April 23, 2008 at 10:30 AM
Oil passed $120 today. I sure hope you're right about the "virtuous cycle" you've talked about.
Posted by: Cervus | May 05, 2008 at 05:19 PM