There's Sudden Enthusiasm For A Beleaguered Energy ETF

In recent weeks, there has been increasing chatter regarding a rally in oil prices. With the United States Oil Fund USO up 11 percent over the past month, it's hard to argue with the notion of a rebound for oil, one of this year's worst-performing commodities.

Still, the energy sector, already the worst-performing group in the S&P 500 this year, remains imperiled. For example, the SPDR S&P Oil & Gas Explore & Prod. (ETF) XOP has barely moved over the past month. It's down more than 5 percent over the past week and is lower by nearly 26 percent year-to-date.

XOP follows the S&P Oil & Gas Exploration & Production Select Industry Index and is a favorite of professional traders for multiple reasons. First, exploration and production stocks are often highly sensitive to crude prices in either direction, making XOP a volatile bet on the oil market. Second, XOP is highly liquid, making it favorite destination for traders looking to short the energy sector.

A Change In Sentiment

While the path of least resistance with XOP and other energy ETFs this year has obviously been lower, some data points suggest market participants are changing their views on XOP.

“The October 35 strike calls have traded in decent size today and although these options are more than 12% out-of-the-money at present levels, we are still paying attention,” said Street One Financial Vice President Paul Weisbruch in a note out Tuesday. “XOP in fact was trading above $35 in mid-May before a swoon in Crude Oil prices and related Energy equities caused it to tumble down to current levels. In this morning’s AM session the sector fund has seen a bit of a relief rally (over 1 percent) and the fund which was in danger of a new 52 week low ($29.8950) is now trading above $31.”

XOP holds 64 stocks on an equal-weight basis with a weighted average market capitalization of $22.1 billion.

Other Ideas

Risk-tolerant traders that believe XOP really has rebound potential may want to up the ante with the Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 3X Shares GUSH. GUSH attempts to deliver triple the daily returns of the same index XOP tracks. 

Remembering that XOP itself is volatile means GUSH can be extremely volatile. That serves as a reminder that GUSH is best deployed over intraday holding periods and is not to be held for weeks or months.

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