Energy vs. Financials, A Divergence of Historical Extremes

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. 

(crossposted on The Futurist).

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