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“Man himself is the beginning and the end of every economy.” – Carl Menger

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Equities are poised to open right around the unchanged level this morning as crude oil is surging following news of the OPEC+ production cut over the weekend.  Within the market, though, there’s a lot of dispersion as energy stocks are surging while tech stocks have been under pressure on concerns that higher oil prices will push inflation higher and keep the Fed on the warpath to hike rates for longer.

The surprise production cut from OPEC+ over the weekend has both oil prices and oil-related stocks rallying this morning as the S&P 500 Energy sector ETF (XLE) is set to gap up over 4%.  As mentioned above, the S&P 500 is treading water after last week’s surge and is poised to open around the unchanged level.  While energy stocks are notoriously volatile, this morning is set to be just the ninth time since 2000 that XLE has gapped up at least 3% even as the S&P 500 ETF (SPY) gapped down or up less than 0.5%.

The first chart below shows the performance of SPY over the last ten years (a period that covers all the occurrences mentioned above) with the red dots indicating each of the days that XLE gapped up 3%+ while the S&P 500 was basically flat or down at the open.  More than half of these occurrences (5) occurred in a three-month span from April to June 2020 with another occurrence last February and the other two occurrences back in 2019 and 2016.  While the most recent occurrence was followed by weakness, the S&P 500 rallied immediately following the prior occurrences.

Below we show a similar chart for the Energy sector.  Here, forward returns were more mixed.  The most positive period was after the most recent occurrence, but forward returns following each of the pre-COVID occurrences were weaker.

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