The End-Of-The-Year Oil Trade Is Spreading To Leveraged ETFs

Oil is mounting a credible year-end comeback. The United States Oil Fund USO, which tracks West Texas Intermediate futures, is up just over 14 percent in the fourth quarter while the S&P Energy Select Sector Index is higher by 6.6 percent.

Crude's fourth-quarter resurgence is, not surprisingly, boosting often volatile oil and gas exploration and production names. For example, the S&P Oil & Gas Exploration & Production Select Industry Index is up about 11 percent this quarter.

That is good news for the Direxion Daily S&P Oil & Gas Exp. & Prod. Bull GUSH, which attempts to deliver triple the daily returns of that index. GUSH should not be held for weeks or months on end, but in a testament to the ETF's ability to deliver large short-term gains, it is up 7.3 percent just this week.

What To Watch For

Oil's ability to take out the $60 per barrel level and perhaps ascend from there could prove pivotal to GUSH's near-term fortunes.

“Oil has struggled to reach $60 per barrel since January when OPEC agreed to cut production supply by about 1.8 million barrels per day in an attempt to stave off a huge drop in oil prices,” said Direxion in a recent note. “The oil industry has pegged $60 per barrel as a healthy number for the commodity. However, even with (mostly solid) compliance among participating nations, the OPEC basket price of oil remained around the $50 level, having never approached the $60 target.” 

Recently, traders have not been shy about embracing GUSH. Over the past month, the ETF is averaging about $187,500 per day in inflows, according to issuer data.

Traders eyeing GUSH should keep an eye on its top holdings. Carrizo Oil & Gas Inc CRZO, Whiting Petroleum Corp WLL, SM Energy Co SM, Oasis Petroleum Inc. OAS together make up just under 10 percent of the fund. 

A Bearish Idea

GUSH has a bearish cousin, the Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares DRIP. DRIP tries to deliver triple the daily inverse returns of the S&P Oil & Gas Exploration & Production Select Industry Index.

DRIP and GUSH track an equal-weight index, but any retrenchment in some of the benchmark's top 10 holdings, which have recently bolstered the index, could favor DRIP. So could disappoints from OPEC or increased U.S. rig counts.

“These next few months will be critical for oil watchers,” said Direxion. “Crude is facing heavy technical resistance in the $58 handle. If it’s going to attempt to get back to 2014 prices, the market’s going to need to see it hit $60 and hold it for a considerable amount of time.”

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