MorningWord 6/6/13: Over the last week Enis has laid out his bearish near term thesis for oil (here) and traded (here) via USO options. Enis is obviously focused on the commodity but in a market environment (whether it be seasonal or not) where global economic data appears to be weakening my sense is that the underlying stocks in the sector (despite being cheap and decent yielders) could be vulnerable. The one year chart of the XLE (the Energy Select etf, where the top 5 holding XOM, CVX, SLB, OXY, & COP make up nearly 50% of the weighting) just broke a very crucial technical level on yesterday’s close.
If in fact global growth concerns rear their head once again this summer, energy stocks with significant overseas exposure could re-test the April lows as investors rotate back into domestically focussed “defensives” after the recent plunge in such sectors like Utilities.
Which leads me to the almost 10% decline in the XLU from the early May highs, quickly approaching a massive support level which matches its 200 day moving average. From a purely technical perspective, from the Nov 2012 lows, to the recent highs, the XLU has now made almost a perfect 50% re-tracement that could set up nicely for a long trade back back to the $39/$40 area.[caption id="attachment_26691" align="aligncenter" width="589"] XLU 1 year chart from Bloomberg[/caption]
If the little spike that we have seen in interest rates does moderate, and if we go back to the U.S. “safe haven” trade on the heels of weaker global economic data, we could see a rotation back into some of the defensive higher yielding sectors (XLU div yield ~3.5% vs the XLE div yield of ~1.7%).
Despite Implied Vol in XLU being in the mid teens, the recent price decline in the ETF has caused IV (blue line below) to make new 52 week highs and Realized Vol (white line) pick up substantially.[caption id="attachment_26695" align="aligncenter" width="589"] XLU 30 day IV vs 30 day Realized Vol from Bloomberg[/caption]
This set up could make put spread sales attractive to express a near-term bullish view, or possibly calendar spreads.
On the flip side, XLE Implied Vol (blue line) while clearly a bit elevated from recent low levels, has not seen a meaningful pick up in Realized Vol (white vol).[caption id="attachment_26696" align="aligncenter" width="589"] XLE 30 day IV vs Realized Vol from Bloomberg[/caption]
This set up could make bearish trades expressed with long premium attractive in the event that the etf does breakdown as Implied and Realized Vol will likely re-test the levels seen last summer.
OK SO STAY WITH ME HERE, I am considering a pair trade Long XLU via Short premium and Short XLE via Long premium. I’ll post on the site if and when I make a move.