Dancing With The Devil: Looking for Bottoms With Leveraged Bull Energy ETFs

West Texas Intermediate crude futures fell by as much as four percent today and the benchmark U.S. oil contract is hovering perilously close to its 2015 low.

Five oil exchange traded funds have hit all-time lows to this point in Tuesday's session while the Energy Select Sector SPDR XLE has tumbled 15.1 percent over the past 90 days. Those data points are not preventing some traders from playing a potentially dangerous game with leveraged bullish energy exchange traded funds.

“As of the first few trading days of August oil prices have recorded their worst numbers since March and natural gas hit a 2-week low. Oil prices fell for the seventh time in 8 weeks, due to the latest weekly U.S. government report that showed an unexpected increase in crude supplies. On top of that, the number of oil-directed rigs increased, adding to the negative sentiment. Geopolitical and economic turmoil in Greece, Iran and China also created pressure,” according to a recent note from Direxion, the second-largest issuer of inverse and leveraged ETFs. 

Of course, Direxion has some products tailored for traders looking to exploit further weakness in energy equities. It would be logical to think the Direxion Daily Energy Bear 3X Shares ERY and the newly minted Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares DRIP, a leveraged bear answer to the well-known SPDR S&P Oil & Gas Exploration & Production ETF XOP, would be hits with traders these days. 

All DRIP and ERY have done over the past month is post an average return of 21.5 percent and while Direxion data indicate volume in DRIP has recently been well above the ETF's trailing 20-day average, it is fair to say traders have been more enthusiastic, and dangerously so, about ERY's and DRIP's bullish equivalents. 

For the five days ended Aug. 10, no triple-leveraged Direxion ETF traded more in excess of its trailing 20-day average than DRIP's bullish counterpart, the Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 3X Shares GUSH. Again, this is a dangerous gambit for traders because GUSH has plunged 32 percent over the past month.

There is another alarming situation materializing with leveraged energy ETFs as well. The aforementioned ERY has a bullish cousin, too, the Direxion Daily Energy Bull 3X Shares ERX. ERX has shed 21.6 percent over the past month. Yet traders have plowed almost $193 million in new assets into ERY since the start of the current quarter while yanking $27.5 million from ERY.

“Market participants are closely tracking a series of crucial economic reports, including those on durable orders, consumer confidence, and pending home sales. However, the key to oil & gas production fortunes may lie in GDP numbers. GDP grew at a 2.3% seasonally adjusted annual rate in Q2. And with the first half of the year’s growth rate at 1.5%, expectations for the economy’s growth potential is lower than previously thought,” notes Direxion.