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Some Traders Are Preparing For An Energy Pullback

ETF Professor

In the first quarter, the energy sector is atoning for its 2018 doldrums and exploration and production stocks are getting in on the act.

With oil headed for one of its best first-quarters on record, the S&P Oil & Gas Exploration & Production Select Industry Index is higher by 15.42 percent.

What Happened

Historically, exploration and production are highly correlated to oil prices, a theme that cuts both ways. Higher oil prices usually lift the volatile exploration and production group while lower crude prices are often a drag on the industry.

This fact illustrates how sensitive exploration and production stocks can be to oil prices: while the S&P Oil & Gas Exploration & Production Select Industry Index is up more than 15 percent year-to-date, it would need to gain another 32.63 percent to get back to its 52-week high.

Why It's Important

If the Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares (NYSE: DRIP) is an accurate gauge, it would appear that some traders believe near-term upside in exploration and production stocks is limited.

The bearish DRIP attempts to deliver triple the daily inverse returns of the S&P Oil & Gas Exploration & Production Select Industry Index. DRIP has been drubbed this year, underscoring the point that leveraged ETFs are not to be held for weeks or months on end. However, the bearish oil exchange traded fund is showing signs of life as it is higher by 2.60 percent over the past week.

What's Next

While just a few days of decent action may not compel traders to get involved with DRIP some other data points might do the trick. Some of those data points confirm traders are already positioning in DRIP.

For March 26 and for the five days ended March 26, DRIP was the top asset gatherer among Direxion's leveraged ETFs, according to issuer data. For the 10 days ended March 26, DRIP added $20.3 million in new assets, a total surpassed by just one other Direxion ETF over that period.

During those 10 days, DRIP's inflows as a percentage of the fund's assets reached almost 47 percent, good for the highest percentage of any of Direxion's leveraged ETFs.

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