SPY304.32+1.35 0.45%
DIA254.29-0.06 -0.02%
IXIC9,489.87+120.88 1.29%

Why It Might Be Time To Consider This Bearish Energy ETF

The energy sector can giveth and taketh away in rapid fashion. For much of this year, it's been the latter, but over the past month the often-volatile S&P Oil & Gas Exploration & Production Select Industry Index (SPSIOPTR) is higher by 26%.

Benzinga · 05/12/2020 15:09

The energy sector can giveth and taketh away in rapid fashion. For much of this year, it's been the latter, but over the past month the often-volatile S&P Oil & Gas Exploration & Production Select Industry Index (SPSIOPTR) is higher by 26%.

What Happened

More so than their integrated counterparts, exploration and production stocks are highly sensitive to oil futures price action explaining why despite that 26% surge, the S&P Oil & Gas Exploration & Production Select Industry Index is still in a year-to-date hole of almost 45%. That may be one reason why some analysts remain less-than-enthusiastic about the energy patch.

And that gets to some reasons why active, aggressive traders may want to give the Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 2X Shares (NYSE: DRIP) a look over the near-term. Formerly a triple-leveraged fund, DRIP is designed to deliver double the daily inverse performance of the aforementioned S&P Oil & Gas Exploration & Production Select Industry Index.

Why It's Important

Last week, CFRA Research downgraded the energy sector to “sell” from “underweight.”

“After rising 60% from the March 23 low through May 5, which was more than twice the rally for the S&P 500, the Energy sector will again soon underperform the overall market,” said CFRA Research Director of ETF & Mutual Fund Research Todd Rosenbluth in a recent note.

Recently, evidence is emerging that more driving is happening as various states start the slow slog of reopening in the wake of the coronavirus, but whether or not that materializes into legitimate bullish demand for oil remains to be seen.

CFRA “does not see consumers returning to their pre-lockdown habits anytime soon, thereby limiting the expected pickup in demand,” according to Rosenbluth. “CFRA also continues to project more-than-ample global supply. S&P 500 Energy Index EPS are projected to fall more than 111% in 2020, according to S&P Capital IQ Consensus Estimates, on a near 33% shortfall in revenues.”

What's Next

What's next for the energy sector could be a dismal second-quarter earnings season, especially given the dismal outlook for air travel demand. Adding to the case for DRIP is that energy stocks may not be as cheap as previously thought.

“Stewart Glickman, a senior equity analyst at CFRA, explained that fundamentals for many segments of the energy market are negative and many stocks are expensive looking forward,” said Rosenbluth. “For upstream companies, Glickman noted that poor energy demand is likely to persist for longer, creating storage problems in the key Cushing, Oklahoma market by the end of May and the rest of the country in the second half --, thus keeping prices under pressure.”