The Energy Sector Is Still Setting Up for a Rally

The energy sector is still setting up for a rally.

Energy stocks are cheap. They’ve lagged the broader stock market all year. They’re setting up for a mean game of “catch-up.”

Yes, I made a similar argument two months ago. And, so far, nothing has happened. The Energy Select Sector Fund (XLE) did enjoy a modest rally in September. But, it gave up those gains last month.

XLE trades today at the same price it was trading at when we first turned bullish on the energy sector. In fact, it’s at the same price at which it started the year.

While the S&P 500 has gained 17% so far in 2025, and the Nasdaq is up 23%, the energy sector hasn’t done anything.

That’s a remarkable level of underperformance.

Take a look at this ratio chart comparing the action in XLE to the action in the S&P 500…

When this chart is moving higher, the energy sector is outperforming the broad stock market. When this chart is declining, energy stocks are underperforming.

Relative to the S&P 500, the energy sector is at its lowest level in the past four years. Or to put it another way… the energy sector is cheaper today than it has been at any time in the last four years.

Of course, that doesn’t mean the energy sector has to rally from here, or that it can’t fall even further. But, if the main strategy of investing is to “buy low and sell high.” Buying into the energy stocks at current levels meets the first criteria.

The proverbial “rubber band” for the energy sector is stretched quite far to the downside. It is set up for one heck of a “snap back” move.

The timing of that move is uncertain. But, the risk/reward setup is favorable enough to allow some patience for it to play out.

I suspect most energy stocks will be trading higher a few months from now than where they are today.

Best regards and good trading,

Jeff Clark
Editor, Market Minute