This is July’s Worst Performing Sector, Sell These Stocks Now

Last week I profiled the best sectors to buy in July for you based on the last 20 years of seasonality.

Check it out here if you missed it.

Today, I need to draw your attention to one of the worst seasonal performers for the month of July as the sector is showing signs that it’s heading for a bad performance in July.

The Energy Select Sector SPDR Fund (XLE) is an ETF that aims to mirror the performance of the U.S. energy sector, primarily investing in large oil and gas companies. It provides exposure to firms like ExxonMobil and Chevron, focusing on energy production, exploration, and equipment services.

For the year, the XLE shares are trading 7.5% higher as rising oil prices have helped “fuel” higher prices for these stocks, but that’s changing.

Since April, the XLE shares have dropped more than 10%.  The drop is due to a combination of drivers including a dramatic decline in Oil prices from April through June, lowering of geopolitical tensions and first quarter earnings results that fell short of investor’s expectations.

All of this in playing into the hands of one of the worst July seasonality trends in the market.

Over the last 20 years, the Energy Select Sector SPDR Fund has averaged returns of 0.7% for the month of July.  That compares to the S&P 500’s average returns of 2.6% for the same period.

This ranks the Energy Select Sector SPDR Fund as the worst performing sector in the market for the month if July,

And the current chart of the Energy ETF shows that this month is set to follow that trend as shares are set up for a 7% drop over the next few weeks.

The Reason?

Oil prices are on their way down while the XLE is preparing to break through a critical technical support level.

Last week, the price of crude oil started to drop from its recent highs after touching the top of their recent range.  The rollover in oil prices is set to run through July, causing a headwind for energy companies.

Additionally, we’re heading into the energy companies’ earnings season in just a few short weeks.

With last quarter’s earnings results in mind, investors are selling these companies ahead of their earnings to avoid another earnings season like last quarter.  That selling comes at a time when many energy companies are seeing their stock prices break below critical support levels.

Here Are a Few…

Exxon Mobil (XOM): Just saw resistance at its bearish 50-day moving average.  The stock is now only 3% away from breaking its critical 200-day moving average.  The last time that happened, Exxon Mobile stock dropped another 9%.

Chevron (CVX): Chevron’s price chart shows the same weakness as Exxon Mobile’s, except the stock is set to fall below its 200-day moving average today.

Conoco Phillips (COP): Conoco shares represent the third heaviest weighting in the sector and their chart is worse than Exxon Mobile and Chevron.

Conoco Phillips stock is in the process of completing a “Death Cross” pattern. This patter happens when a stock’s 50-day moving average moves below its 200-day moving average.

The Death Cross signals that long-term momentum on a stock is growing more negative.

COP Death Cross Price Chart

The last Death Cross on COP shares happened in April 2023. The stock dropped 10% decline in the stock over the following month.

All of this, and the historical seasonality trend for July, serves as a warning for energy investors.

The Energy Select Sector SPDR Fund is trading at $89 with selling pressure on the rise.

XLE Price Chart

Watch for the XLE shares to drop below their 200-day moving average at $87.00 over the next week.  That drop will take it below the XLE’s 200-day moving average, triggering a selling event ahead of the energy sector’s earnings results at the end of the month.

Target a move from there to $82, about 8% lower than today’s price.

Here's How You Trade This

Consider taking a break from holding the Energy Select Sector SPDR Fund for now. July’s weak seasonality leads right into August, which is THE worst month of the year for energy stocks.  We’ll get into that in a few weeks.

If you’re a bear, consider leveraging the next two months of weakness using three to four month put options.  The longer expiration period with 3–4-month expiration puts will allow time for the upcoming earnings season and price trends to play out on the energy sector.