In the coming days ahead, short-term swings could make or break the energy sector-related exchange traded fund as short interest on oil stocks rise to a seven-year high.
The Energy Select Sector SPDR Fund (NYSEArca: XLE), which tracks energy companies from the S&P 500 index, has declined 8.6% over the past three months but is slightly up 0.2% year-to-dated. [Oil Sector ETFs Look Cheap as a Long-Term Play]
As of the end of January, the average Energy sector stock had 9.88% of its floating shares sold short, the highest level of short interest for energy stocks since at least 2008, according to Bespoke Investment Group.
The close to double-digit short interest reflects growing concern for the energy sector. To put percentage of short interest in perspective, the only time the markets saw double-digit levels of short interest for any sector was during the global financial crisis.
Short interest reflects the percentage of shares outstanding that investors have sold short but not yet covered or closed out. It provides a gauge of market sentiment, revealing investors’ bearish outlook the market.
However, given the high amount of shorts, a positive turnaround in oil prices could easily fuel a quick rally. For instance, a contrarian investor would benefit from a sudden short squeeze as pessimistic traders rush out of bearish bets if the markets turns bullish.