Kotok: Sell XLE, Buy DXJ On Lower Oil

December 02, 2014

The slump in oil prices calls for some asset reallocation.

Oil prices are in a precipitous downfall that has pulled WTI crude down to five-year lows this year. That downward spiral picked up steam following OPEC’s decision over the Thanksgiving holiday to keep production apace.

To market experts such as Cumberland Advisors’ David Kotok, oil at $65 a barrel suggests the beaten-down energy sector will remain under pressure. Consider that, year-to-date, energy is the worst-performing sector of the S&P 500, sliding nearly 10 percent, while the broad benchmark has tacked on gains of nearly 13 percent.

Funds like the $11.2 billion Energy Select Sector SPDR Fund (XLE | A-95) and the SPDR S&P Oil & Gas Exploration & Production ETF (XOP | A-46) continue to slide, as the year-to-date chart below shows:


Chart courtesy of StockCharts.com

Sell XLE, XOP and other energy-related ETFs. That’s Kotok’s No. 1 piece of advice to investors today.

In an interview with ETF.com, he also said that while energy exposure needs to be substantially trimmed, opportunities beckon in other sectors such as consumer discretionary and housing, and more specifically to ETF investors, in countries like Japan and currency-hedged funds like the WisdomTree Japan Hedged Equity Fund (DXJ | B-64).

ETF.com: Broadly speaking, some say this was less of an OPEC decision and more of a Saudi Arabia decision. Does it matter to U.S. investors?

David Kotok: It was all Saudi Arabia. Saudi Arabia made a decision that was really a geopolitical decision. They could slow down U.S. expansion in shale; they could slow down Canadian tar; they could hurt Iran.

They have the staying ability to do whatever they want, and you can see that in their decision to see where things stand six months from now. If I were in Riyadh making the decision, I would have done exactly what the Saudis did, which was to say: “We are going to produce just as we have been. It’s too soon to dramatically react.”

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