Most traders and investors have been cheering the energy sector this year as the group is the best-performing segment in the S&P 500.
That fanfare has increased in recent days as the Energy Select Sector SPDR (NYSEArca: XLE) and rival energy exchange traded funds are rallying following last week’s Organization of Petroleum Exporting Countries (OPEC) meeting.
Although OPEC agreed to cut output by 32.5 million barrels per day, some traders see opportunity in energy ETFs from the short side over the near-term. Some technical analysts are concerned about the state of equity-based energy ETFs after the group has pushed higher for much of this year.
SEE MORE: Energy ETFs Rally as Russia Joins OPEC in Considering Supply Limits
“The market has moved so far, so fast. XLE was already in overbought territory prior to the week’s biggest gain in nearly six years. Investors are likely to seek a pullback before deploying new flows of capital into XLE,” according to a Seeking Alpha analysis of XLE.
The energy sector is just one of two S&P 500 sectors that currently trades at a noticeable discount to its long-term averages.
Additionally, the energy sector is usually among one of the largest sector weights in value ETFs, underscoring the point that the group is attractively valued relative to some defensive sectors, which trade at lofty multiples.
“XLE was in overbought territory prior to experiencing its biggest weekly gain in nearly six years. Several key catalysts became a confluence of events at one time to push XLE much higher. However, this move in prices may have become overdone to the upside by moving too far too soon,” adds Seeking Alpha.
For those seeking a hedge against further weakness in the energy sector, the ProShares Short Oil & Gas (NYSEArca: DDG) tries to reflect the inverse, or -100%, daily performance of the Dow Jones U.S. Oil & Gas Index.
The UltraShort Oil & Gas ProShares (NYSEArca: DUG) takes two times the inverse, or -200%, daily performance of the Dow Jones U.S. Oil & Gas Index. More aggressive traders can take a look at the Direxion Daily Energy Bear 3X Shares (NYSEArca: ERY), which reflects three times the inverse, or -300%, daily performance of the energy select sector index.
For more information on the oil market, visit our energy category.