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Some Traders Betting The Energy Rally Is On Borrowed Time

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May was a big month for oil, with crude jumping over $70 for the first time since 2014.

Even though the commodity is down slightly from its high of $72.90 on May 22, things are still looking up for the market; energy has been the third strongest sector of the S&P 500 this year.

But despite the strength in energy, signs from the Direxion Daily Energy Bull 3X Shares (NYSE: ERX) and the Direxion Daily Energy Bear 3X Shares (NYSE: ERY) could indicate short-term traders are betting on a reversal of the energy's sector recently bullish fortunes.

ERX attempts to deliver triple the returns of the Energy Select Sector Index while the bearish ERY tries to deliver triple the daily inverse returns of that benchmark. Exxon Mobil Corp. (NYSE: XOM) and Chevron Corp. (NYSE: CVX), the two largest U.S. oil companies, combine for almost 40 percent of that index.

While energy stocks have been surging, Direxion data indicate traders have been taking profits in the bullish ERX while adding capital to the bearish ERY.

For the month of May ERX, the bullish fund, saw a total outflow of $23.33 million, while ERY saw a total inflow of over $6.29 million, according to FactSet.

Traders favoring ERY over ERX is notable for several reasons, not the least of which is that the energy sector is entering a time of the year that has been unkind to energy stocks. In June, the largest ETF that tracks the Energy Select Sector Index is usually one of the worst-performing sector ETFs.

Since coming to market in mid-1998, the Energy Select Sector ETF “has averaged a loss in the months of June, July, August, and September,” according to Schaeffer's Investment Research.

Neither ERX nor ERY should be held for extend time frames. Leveraged ETFs are based as intraday instruments or maybe held for several. If historical trends hold up, ERY could be a near-term idea for risk-tolerant energy sector traders.

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