Up Over 100% YTD, This Leveraged Energy Plays Looks Unstoppable

The energy sector has been flourishing while most of the stock market has been languishing amid inflationary pressures, causing the Direxion Daily Energy Bull 3X Shares (ERX) to rise over 100% this year.

ERX seeks daily investment results equal to 200% of the daily performance of the Energy Select Sector Index. The index is provided by S&P Dow Jones Indices and includes domestic companies from the energy sector, which includes the following industries: oil, gas, consumable fuels, and energy equipment and services.

“Oil and natural gas are hot, and so are American energy stocks,” a Wall Street Journal article said. “But investors, whether they have been along for the ride or are just thinking of joining now, may be wary of getting burned.”

“January through March of this year was the best quarter for the sector since 1970, according to BofA Global Research,” the article added. “While the S&P 500 is down roughly 13% year to date, the energy sector is up 49%. That follows a year when energy stocks beat the broader index by 21 percentage points.”

ERX Chart

ERX data by YCharts

This Time May Be Different

With energy being a cyclical sector, it’s prudent for investors to wonder whether they might be getting on the bandwagon too late. However, with inflationary pressures looking more persistent than transitory, it could be more strength ahead for the sector.

“Investors who are tempted by energy’s returns might be wondering if the rally has already run its course,” the WSJ article noted. “Energy is a cyclical sector, after all: Exhilarating peaks tend to be followed by equally harrowing troughs. Periods of high prices either lead to more drilling or damped demand until eventually, the commodity’s price falls.”

The article noted that the Energy Information Administration (EIA) forecasts a ramp-up of crude oil production in 2022 and subsequently 2023. Additionally, the Russia-Ukraine conflict is adding a geopolitical component that can continue to push oil prices higher.

“But this time may be different,” the article noted further. “It is notable how disciplined U.S. oil-and-gas companies plan to be with their drilling—and not just as atonement for past excesses. While equipment and labor shortages have been a feature of almost every energy cycle, Dan Pickering, founder and chief investment officer of Pickering Energy Partners, notes that he has never seen today’s level of scarcity.”

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