Energy stocks have had a great year. The benchmark Energy Select Sector SPDR Fund (XLE) has gained 53% in 2022, making energy by far the top-performing sector of the market.
However, energy stocks failed to participate in the November rally. As the following chart demonstrates, the XLE ETF (black) has underperformed the SPDR S&P 500 ETF ( (SPY) , green) by a wide margin since the start of November.
Chart Source: TradeStation
The XLE chart, shown below, indicates that the entire sector is rolling over. The ETF has formed a bearish rounded top pattern (curved black line). Traders should consider taking profits on long positions now while the energy sector is still above its 50-day (blue) and 200-day (red) moving averages.
Chart Source: TradeStation
The damage to the energy sector isn't limited to oil. The January contract for natural gas (NGF23) plunged 10% on Monday. The high volume, accompanied by a large gap, indicates aggressive selling.
Chart Source: TradeStation
Natural gas stocks look terrible. On Monday, EQT Corp. (EQT) closed underneath its 200-day moving average (red) for the first time since January. The stock traded on its heaviest volume in over a month.
Chart Source: TradeStation
The chart of Antero Resources (AR) has a similar look. Shareholders should exit these names as the decline could accelerate from here.
Chart Source: TradeStation
Is energy's underperformance due to sanctions against Russia? The European Union and the U.S. have instituted a price cap of $60 per barrel on Russian crude oil.
Did this weekend's OPEC+ decision to maintain current production targets have a negative impact?
While those two news items are dominating the energy headlines, I believe the answer is simple. We're most likely going into a recession in 2023, and therefore the demand for energy will fall. That decrease in demand is being priced into energy markets now.
Online retailer Amazon (AMZN) , which previously announced 10,000 layoffs, now seems likely to raise that figure to 20,000. Amazon CEO Andy Jassy recently commented, "This next year or two, the economy is going to test the long-term resolve of a lot of companies."
Jassy is one of a growing chorus. Michael Burry, who famously made millions as the real estate market crashed in 2008, recently tweeted, "We are really looking at an extended multi-year recession."
Tesla (TSLA) CEO Elon Musk wrote that the Fed is "massively amplifying the probability of a severe recession." David Rosenberg, founder of Rosenberg Research, says the economy "is going to have a very rough ride in the next 12 months."
A common theme has emerged, and if it is correct, energy could be in for a rough ride next year. The time to trim energy holdings is now.
(XLE is a holding of Action Alerts PLUS. Want to be alerted before the portfolio buys or sells these stocks? Learn more now.)