Emphasizing Leveraged Energy ETFs During Earnings

The energy sector, the seventh-largest sector weight in the S&P 500, has been the worst-performing group in the U.S. for essentially all of 2017, but in recent weeks, the tide has been turning favor of downtrodden energy equities and the related exchange traded funds.

With third-quarter earnings taking the stage, the sector could be set for active, risk-tolerant traders to consider leveraged energy ETFs like the Direxion Daily Energy Bull 3X Shares (NYSE:ERX) and the Direxion Daily Energy Bear 3X Shares (NYSE:ERY). ERX looks to deliver triple the daily returns of the Energy Select Sector Index while ERY seeks to deliver triple the daily returns of that index.

Data suggest analysts are growing bullish on energy stocks even as earnings growth estimates for the sector have recently been trimmed.

Bullish Views

At the sector level, analysts are most optimistic on the Information Technology (58 percent), Energy (57 percent), and Health Care (56 percent) sectors, as these three sectors have highest percentages of Buy ratings, said FactSet in a recent note.

If ERX and ERY are accurate indicators, traders have recently been betting that the energy sector is due for a pullback. For example, ERY is averaging daily inflows of over $1 million over the past month while ERX, the bullish triple-leveraged energy ETF, is averaging daily outflows of $5.4 million over the same period, according to Direxion data.

The Energy Select Sector Index allocates over 38 percent of its combined weight to Dow components Exxon Mobil Corp. (NYSE:XOM) and Chevron Corp. (NYSE:CVX), the two largest U.S. oil companies.

Favorable Data

Still, some data points suggest ERX could be the better bet with energy earnings season shortly arriving.

Energy has been tough this year with the S&P 500 Energy Sector down 17 percent through the end of August, said Direxion in a recent note. But there may be a silver lining for the maligned sector. US oil inventories are now the lowest theyve been since early 2016. Natural gas inventories are within 1% of their five-year average and much lower than this time last year.

"And the Baker Hughes rig count, which rose almost in a straight line from June 2016 to June 2017, has flattened out with little to no net new rigs coming online in the last three months. Another piece of good news is that the S&P 500 energy sector has been positive in October, November, and December on average over the last ten years. OPEC continues to try to freeze its output as well.

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