The Most Perfect Trade In The Market Is Getting Dangerous
The cleanest trade in the market
Energy hasn’t just rallied, it’s turned into one of the cleanest, most one-sided trades in the market. What started as a squeeze setup has evolved into near-perfect trend behaviour, with momentum, flows, and positioning all reinforcing the move. The question now isn’t whether the trade has worked, it’s how far this kind of “perfection” can stretch before positioning, not fundamentals, starts to matter.
XLE perfection
Back in mid-December, we highlighted the massive squeeze risk building in energy: “XLE continues trading inside the huge multi-year range… when that range eventually breaks, liquidity vacuums tend to form.”
Since then, XLE is up over 40%, riding a near-perfect trend channel that would make even Madoff jealous. Buying the 21-day moving average has been a simple, and very profitable, strategy.
Source: LSEG Workspace
Overbought superlatives
XLE’s daily RSI has only reached these levels a handful of times over the past decade, while the weekly RSI is now at its most overbought levels since 2011.
Extremes like these don’t end trends, but they do change the risk-reward.
Source: LSEG Workspace
Source: LSEG Workspace
The 200 day MA overshoot
XLE is now trading ~33% above its 200-day, a meaningful stretch, even if 2022 saw more extreme dislocations. In terms of percentage dislocations, the 2022 overshoot was even more extreme, with XLE trading more than 40% above the 200-day.
Source: LSEG Workspace
What a bull
IXE at 14th consecutive weekly gain, absolutely crushing it.
Source: GS
Locked and loaded
Investors have poured capital into the long energy trade.
Source: GS
XLE isn’t oil…
…but it’s trading like it is. The relationship is tight right now, so watch any pullback in oil closely.
Source: LSEG Workspace
Hedge stretched XLE
The trend remains intact, but the setup is no longer one-sided.
With XLE stretched across momentum and positioning metrics, a put spread offers a cleaner way to hedge near-term downside without fading the broader trend. Chart shows the XLE May 60/55 put spread, offering just above 4x max.
This has been a perfect trade, now the asymmetry is shifting.
