John Kosar, Asbury Research
A recovery by the beleaguered energy sector has been one of the most anticipated events in recent memory, largely because of seemingly endless investor attraction to buying the bottom in a presumably undervalued asset. A 29 percent collapse in the Energy Sector SPDR ETF (XLE) between June 2014 and mid-January 2015, during which time the ETF underperformed the S&P 500 SPDR ETF (SPY) by 30 percent, certainly made this asset potentially attractive by those standards.
The key, though, is not only correctly determining when an asset is undervalued but more importantly, when investor assets start moving back into that sector because arbitrarily jumping into a collapsing asset is one of the most potentially dangerous things that an investor can do. Back in late November, our own in-house metric, which measures historic versus daily ETF asset flows, showed that just 11 percent of sector bet-related assets were being allocated to energy, compared to an historic 20 percent. About five weeks later, in early January, our metric showed that investor assets were slowly but measurably moving back into energy from other sectors, which was a key component of moving our model back to an overweight status. Since then, XLE has risen by 8 percent while outperforming SPY by 7 percent.
Finally — and perhaps most important — is our data shows that the biggest inflow of ETF-related investor assets over the past one-week, one-month and three-month periods has been into energy. This pattern of positive inflows is key to fueling and maintaining a rise in the price of an asset. Should it continue, it could help propel energy-related assets to additional gains this quarter and potentially into midyear.
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