Selling in Oil Stocks Lead to Edges in ETFs

There’s no better example of the ferocious selling in oil stocks than the recent performance of leveraged exchange-traded funds like the Direxion Energy Bull 3x Shares ETF (ERX).

ERX has closed lower for nine days in a row, the last five in technically oversold territory. And while many traders and active investors are avoiding these ETFs like the plague – where not selling them short – the data suggests that the funds are actually moving closer to levels where traders have traditionally been lured off the sidelines, looking to buy.

This is due to the extreme nature of the selling in underlying energy stocks, from major integrated oils like Exxon Mobil Corporation (XOM) to equipment and services companies like Schlumberger (SLB). As traders and investors continue to exit these stocks, the share prices of ETFs like ERX move lower. And given their leveraged design, these funds often are moving lower faster than many of the stocks they represent.

But this level of selling has proven to be unsustainable in the short term. The last time ERX was this oversold, for example, back in the second half of September, buyers rushed in to send the fund higher by 13% in two days.

While the current pullback in ERX may prove different, the fund’s short-term performance in September was typical of how this fund and others have performed after being becoming extremely oversold.

Traders looking for a little less leverage may want to consider the ProShares Ultra Oil & Gas ETF (DUG). While ERX is leveraged three to one to the daily performance of the Russell 1000 Energy Index, DUG is only leveraged 200% or two to one (to the Dow Jones U.S. Oil & Gas Index).

Note that DUG has not yet earned the same high “consider buying” ratings as ERX, despite the fact that the fund is very oversold after closing lower for nine days in a row. ERX, which has the same selling streak, will open on Monday with our highest possible ratings and is likely to see short term strength early next week based on historical trends.

The ETFs and stocks in today’s report were drawn from the data and research available through PowerRatings. To find out more, click here.

David Penn is Editor in Chief of