This 3 month comparison of energy to momentum stocks shows that they both were performing well through March 12, but then they began to diverge, and energy stocks ramped higher, while momentum stocks rolled over. XLE finished the last 3 months up 11% and MTUM finished down .5%.
This is a great example of the flight of capital. You could make the case that money was rotating out of momentum or into energy stocks as energy stocks were trading at much cheaper valuations and the market suddenly began trading off of fundamentals and not off momentum.
But, if there's one thing that this shows us, is that in the current market environment, capital is likely to flow back and forth between in favor and out of favor sectors as money managers attempt to seek alpha.
I believe that the run up in XLE has been so robust, and happened so quickly that money managers must take profits while they see them, or to at least protect those profits using an options hedge. So, it's no a surprise when I saw several large XLE put trades yesterday - the Jun $93 and Jul $90 puts traded over 50k contracts, bought to open (meaning the trades have a bearish bias).
So, I think that XLE and the stocks in it are due for an imminent correction. Signs of it are already showing in the last several days. Valero (VLO) is one of XLE's largest holdings, and I like it for a bearish trade.
VLO's chart has some very bearish characteristics going on right now as well, which makes my case even stronger that a fall is imminent.
1. Bearish MACD divergence from the March to April peaks.
2. Bearish MACD cross over took place yesterday, indicating a sell signal
3. A 3 black crows bearish candlestick formation is about to complete, which is typically a reversal pattern.
See my estimated price projections using the Fibonacci extension tool.
Target 1 = $52.50
Target 2 = $48.70
Long VLO Jun $55 / $50 Put spread @ 1.63.
Break/even or profit from the trade at June expiration if price is at $53.37 or below.