A favorable seasonal period for the energy sector approaches

Key Points

• The energy sector has had a terrific run - quadrupling since the 2020 Covid lows
• This market is about to enter a seasonal period of typically favorable performance
• Ticker XLE allows traders to play the broader energy sector

Energy

For our test, we will use an energy sector data series that goes back to 1954. The index uses the Fama French data series from 1954 into 1990 and S&P 500 Energy Sector from there.

The chart below displays the annual seasonal trend for XLE (Energy Select Sector SPDR ETF). A favorable seasonal period extends from Trading Day of the Year (TDY) #56 through TDY #83. For 2022, this period extends from 3/23 through 5/2.

The chart below displays the growth of $1 invested in the Energy sector data series described above only during this favorable period each year since 1954.

The table below displays a summary of performance results.

What the research tells us…

The good news is that historically energy stocks have gained ground during the highlighted seasonal period in roughly three out of every four years, and the average and median gains are twice as large as the average and median losses. In addition, this sector has shown a gain of over +9% on eight separate occasions and a loss of over -9% only once.

The bad news is that one never knows which year will be that one-in-four down years until after the fact. Following a seasonal trend requires a "leap of faith" (or, even better, some confirmation from other indicators and/or price action itself).