Shorts Still Love This ETF's Holdings

Underscoring the acute weakness faced by natural gas stocks, the First Trust ISE-Revere Natural Gas Index Fund FCG is off 70.7 percent over the past year. That performance is 1,650 basis points worse than the futures-based United States Natural Gas Fund UNG.

To its credit, FCG is up a third of a percent over the past month, but the exchange traded fund closed last Friday at $3.36. As has been previously noted in this space, that's a price point where a reverse split becomes a legitimate possibility, though it must be noted First Trust has not made any announcements to that effect regarding FCG.

Even with FCG down so much over the past year and sporting a cup of coffee handle, short sales data imply more downside is on the way for the ETF because some bearish traders are quite fond of some of FCG's holdings.

Of the 20 most shorted U.S. stocks, according to Markit data, three are members of FCG's 30-stock lineup. Those names are, in order of highest percentage of shares out on loan to short sellers, Chesapeake Energy Corp. CHK, Southwestern Energy Co. SWN and Range Resources Inc. RRC. Those stocks combine for 12.5 percent of FCG's weight.

What is troublesome for FCG is that short sellers are piling into these stocks after catastrophic declines. Down nearly 90 percent over the past year, Chesapeake trades at a $2 handle, indicating that if shorts see more downside in the name, some believe the stock could go to $0.

Range Resources plunged nearly nine percent last Friday to bring its 12-month slide to almost 54 percent. Southwestern Energy slumped 16.5 percent last Friday, bringing its one-year plunge to 74 percent. That stocks $7.09 handle is good for two trips to Starbucks...maybe.

As has been previously noted in this space, some of FCG's 30 holdings are facing credit and liquidity issues.

Tumbling oil prices drained the financial positions of an array of mid- and small-cap shale producers, prompting scores of credit downgrades and sparking concerns over a spate of defaults. Lenders to some of the companies found in FCG are refusing to extend further credit to those firms.

In fact, some banks that lend to shale producers are tightening liquidity requirements, which could be seen as a sign these lenders don't want to be left with nothing if their borrowers go bankrupt. Highly leveraged oil and gas producers, including some found in FCG's lineup, are also attracting interest from short sellers.