ETF Trends
ETF Trends

Down 15% year-to-date, the Energy Select Sector SPDR (NYSEArca: XLE) is the worst performer among the nine sector SPDR exchange traded funds this year and traders’ pessimism toward the energy sector is reflected in elevated short interest in some of XLE’s big-name holdings.

Ongoing struggles for XLE and rival energy ETFs are prompting some market observers to wave the white flag when it comes to forecasting what’s next in the energy patch.

Some institutional investors are steering clear of energy stocks, but at least one exchange traded funds strategist is embracing beaten-up energy sector ETFs. However, that could portend opportunity with XLE.

Profit expectations have fallen dramatically which in turn has pushed the sector’s P/E ratio much higher even as stock prices have declined, though P/Es have come off their highs and estimates appear to have stabilized,” according to AltaVista. [Oil ETF Dividends Appear Safe…Sort Of]

“Bespoke Investment Group observes that short interest as a percent of shares available for trading, known as the “float,” has spiked for the average company in the energy sector, to 11.6 percent as of mid-October,” reports Luke Kawa for Bloomberg.

Valuations are also sitting at relatively attractive levels as well. Looking at the energy sector’s price-to-book ratio since 1990, the sector’s valuations are hovering near lows last seen during the financial downturn.

Morgan Stanley says investors can find more attractive entry points in the energy sector several months out, indicating that there is no need to bottom-fish at current levels.

Should energy sector ETFs see more waning momentum, which is exactly was seen Tuesday, the UltraShort Oil & Gas ProShares (NYSEArca: DUG) and the Direxion Daily Energy Bear 3X Shares (NYSEArca: ERY) could prove to be winning trades. ERY attempts to deliver three times the daily inverse performance of XLE’s underlying index while DUG is a double-leveraged inverse play on the Dow Jones U.S. Oil & Gas Index.

“In mid-2008, short interest as a share of float for the average financial stock peaked at 11.7 percent, a tick higher than the current level for energy equities, according to the report,” adds Bloomberg.

Energy Select Sector SPDR

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.