Energy is the worst-performing sector in the S&P 500 this year, but there are inklings, however modest they may be, that the group is poised to bounce back.
What Happened
One example of an inkling is the 2.70% gain this week for the Energy Select Sector Index (IXETR). That's not much measured against an 8% month-to-date decline, but rebounds have to start somewhere and if the Direxion Daily Energy Bull 3X Shares ERX is an accurate gauge, some traders are betting on a rally for traditional oil names.
The bullish ERX is designed to deliver triple the daily returns of the Energy Select Sector Index. As such, that leveraged ETF is up more than 8% this week.
Why It's Important
While leveraged oil ETFs have a way of vexing traders, the funds remain popular with the risk-tolerant crowd and that is true of ERX. For the 10 days ending Tuesday, Aug. 20, traders put nearly $40 million into ERX, a total surpassed by just four other of Direxion's leveraged ETFs, according to issuer data.
When betting on ERX, traders are essentially making short-term bets on Exxon Mobil XOM and Chevron CVX. The two largest U.S. oil companies combine for nearly 43% of the index that ERX delivers triple the daily returns of. Indicating that there might be something to this recent rally in ERX, analysts have been getting positive on Exxon and Chevron.
In a note out Tuesday, BMO analyst Daniel Boy sounded bullish on the two oil majors and that follows a Barclays note out last week where an analyst chatted up Chevron.
“Chevron is well positioned to both return significant free cash flow to shareholders and fund its…compound annual growth rate guidance,” according to the bank.
What's Next
Hopefully, higher oil prices are what's next for those long ERX. Or, at the very least, reduced commentary about a recession and/or some data indicating global oil demand could perk up. If ERX can clear $17, it has upside to $18 to $20 over the near-term.
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