Leveraged Energy ETFs For Earnings Season

First-quarter earnings season starts in earnest this week, and while expectations for multiple sectors, including energy, are not so great, opportunities with leveraged sector exchange-traded funds are bound to present themselves in the coming weeks.

That includes the Direxion Daily Energy 3X Bear Shares (Direxion Shares Exchange Traded Fund Trust ERY) and the Direxion Daily Energy 3X Bull Shares (Direxion Shares Exchange Traded Fund Trust ERX). Those ETFs track the S&P Energy Select Sector Index, the same index followed by the widely followed Energy Select Sector SPDR (ETF) XLE.

How Much Influence Will Earnings Season Have?

While oil supplies show only modest signs of dwindling, energy earnings estimates for 2016 are contracting, market observers expect oil supply to continue outpacing demand, and it would appear next year could be another rocky one for exploration and production equities.

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Depending on one's view, ERY is the play on energy stocks this earnings season because the sector's earnings outlook is grim. Conversely, some traders are likely to embrace ERY because they will argue that the worst has already been baked into the sector.

“According to FactSet Research, the Energy sector is expected to report the largest year-over-year decrease in sales (-28.2 percent) for the quarter. Five of the six sub-industries in the sector are projected to report a decrease in revenues: Oil & Gas Drilling (-42 percent), Oil & Gas Equipment & Services (-36 percent), Integrated Oil & Gas (-34 percent), Oil & Gas Exploration & Production (-30 percent), and Oil & Gas Refining & Marketing (-18 percent). Global oil and gas behemoths, including Exxon Mobil (Exxon Mobil Corporation XOM) and ConocoPhillips (ConocoPhillips COP), will start reporting first-quarter earnings in late April. Last year Exxon profits were cut in half and ConocoPhillips saw a net loss in 2015 of $4.4 billion. The supply glut that started in 2014 continues, even as nine oil and gas companies have filed for bankruptcy protection during last quarter alone, according to Haynes and Boone LLP,” said Direxion in a recent note.

Traders looking to mark their calendars in order to start positions in ERX or ERY should look to the week of April when Halliburton Company HAL reports, followed by rival Schlumberger Limited. SLB on April 25. By the time May 4 rolls around, all of XLE's top 10 holdings, a group that accounts for about two-thirds of the largest energy ETF's weight, will have delivered first-quarter results.

What's Going On Right Now?

ERY and ERX are looking like a calm before possible storms, as volume in the former has increased only modestly in recent days relative to its trailing 20-day average while ERX is seeing waning turnover during the same period, according to Direxion data.

However, it is clear how traders are positioning with these ETFs. Over the past month, ERX has averaged daily outflows over the past month while an average of $1.3 million per day has poured into the bearish ERY over the same stretch, according to issuer data.