Complex Geopolitical Environment Enlivens Direxion's Oil And Gas Bull, Bear Funds

Thanks to the paradigm shift that President Donald Trump imparted, investors face a complex and dynamic market environment in the oil and gas exploration and production sector, commonly referred to as upstream. A metaphor symbolizing the hydrocarbon supply chain as a river, fossil fuels are first extracted, then transported (midstream) to refiners (downstream), where the end product is ultimately sold.

Understanding this basic hierarchy is critical because, by default, investments tied to the exploration and production segment often react sharply to benchmark indices such as West Texas Intermediate or Brent Crude futures. Also, domestic and global energy policies may have a significant impact on demand, leading to both potential rewards and great risks.

Notably, the battle for control of the hydrocarbon space continues fiercely despite one side apparently dominating affairs at the moment. While oil prices have struggled for momentum this year, there are possible catalysts on the horizon. Perhaps most pressingly, Russia's invasion of Ukraine poses unique challenges for global oil supply chains.

Last month, President Trump threatened to impose sweeping "secondary tariffs" on any country purchasing Russian oil, reflecting growing fissures in the geopolitical realm. In addition, the OPEC+ cartel represents a consistent wildcard, with its ability to impose production cuts capable of artificially lifting prices.

Nevertheless, it's quite clear that the bulls have their work cut out for them. Both West Texas and Brent have dropped sharply since the beginning of January, reflecting severe demand erosion. Not helping matters is the state of the economy. With many experts sounding the alarm that Trump's trade policies may sink the nation into recession, the appetite for hydrocarbons simply isn't robust.

Finally, the kicker – the domestic oil industry has been boosting production, further deflating prices. In particular, the U.S. shale sector is well-positioned to deliver on the president's call to "drill, baby, drill." While the initiative may do wonders for political optics, it doesn't help with bolstering sagging hydrocarbon prices.

The Direxion ETFs: For the brave souls who wish to speculate in this exciting but also volatile space, financial services provider Direxion offers two specialized financial instruments. For the optimists, the Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 2X Shares GUSH seeks the daily investment results of 200% of the performance of the S&P 500 Oil & Gas Exploration & Production Select Industry Index.

On the other end of the sentiment spectrum, the pessimists may research Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 2X Shares DRIP, which seeks to replicate 200% of the inverse performance of the aforementioned index.

Primarily, both exchange-traded funds offer speculators a convenient mechanism to utilize leverage or participate in short trades without engaging the complexities of the options market. Individual shares or units of these ETFs can be bought and sold, much like any other publicly traded security.

However, great caution must be applied before participating in these leveraged funds. First, the 200% leverage makes these instruments wildly volatile. Second, these ETFs should not be held for a period lasting longer than one day. Doing so may lead to a performance drag due to the daily compounding effect.

The GUSH ETF: Predictably, Direxion's leveraged bull fund has gotten off to a poor start this year, losing nearly 35% of market value.

In the past two months, the GUSH ETF has printed a "5-5" sequence consisting of five up weeks and five down weeks, with a net negative tilt for the period.
Given the deterioration since the start of the year, the next likely sequence is a 6-4 sequence with a negative tilt, which statistically features a low probability of upside.

The DRIP ETF: On the other side of the fence, Direxion's leveraged bear fund is off to a flying start, gaining over 18%.

In the past two months, the DRIP ETF has also printed a "5-5" sequence but with an upward trajectory. However, this pattern tends to have slightly negative (as in poor) odds.
Assuming DRIP achieves a 6-4 sequence, even this formation may not be enough, as traders historically refuse to buy the bear fund if they perceive it to be overcrowded.