The Energy Select Sector SPDR ETF (NYSEArca: XLE) surged nearly 11%, good for one of the best performances among the nine sector SPDR exchange traded funds.
XLE’s October resurgence came as investors digested what was a batch of predictably dire earnings reports from the energy sector. Heading into the start of third-quarter earnings season, some market observers predicted energy sector earnings would contract as much as 60%, the worst contraction of any S&P 500 sector.
XLE is still 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]
Now, energy majors, such as those found in XLE and rival energy ETFs, are resorting to cutting costs to appease investors. However, most oil giants are protecting if not raising dividends.
“Oil executives are standing by promises to protect dividend payouts from the collapse in crude prices even as they fire workers, cancel drilling projects and sell everything from oil fields to aircraft to conserve cash,” reports Bloomberg.
Still, some traders believe there is more downside to come for the sector.
“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.
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.
Energy Select Sector SPDR
