The energy sector has been on every watch list since weak first quarter data muddied the water as to when the FOMC will tighten. Global macro traders shone in 2014 as the Fed completed tapering and set the table to raise rates in 2015 while Europe prepared to open the spigot leading to dollar strength and commodity weakness.
Despite this, flows in the energy sector were relatively stable through the downturn late last year as investors were eager to make long dollar/short commodities trades. March 16 was the turning point with traders taking on the opposing tack, and there was no more beaten up fund than the Energy Sector Select SPDR (XLE) heading into 2015 (see “Energized”). XLE pulled in more than $2.5 billion in the first quarter of 2015.
The rush back into energy stocks has more than a few traders asking whether crude oil had bottomed. Weekly volumes for XLE have been declining steadily since the start of the rally, and while the fund has cleared its 20-week moving average, longer-term technicals are bearish with resistance at the 50-week moving average (see “Energized). The rush from short to long positions also has knocked out a key igniter for any rally: Strong short interest. Our research shows XLE currently trades with a low short interest ratio at the 38th percentile as the action off the February lows has led more traders to cover shorts, leaving little room for fundamentally inclined investors with the trailing 12-month P/E ratio for XLE close record highs.
Traders looking for a cleaner way to express short dollar/long energy in a single fund might want to look at the energy sector’s kissing cousin, natural resources, where investors are reluctant to put new capital to work despite the faltering dollar.
It’s not hard to see why; currency and energy funds offer more direct exposure and concerns over China’s faltering growth continue to weigh on global commodity demand. Funds with low dollar/high energy exposure like the WisdomTree Global Natural Resources Fund (GNAT) can offer a more levered approach to commodity exposure with less volatility than, say, the gold miners. But like the miners, natural resource funds were stuck in a multi-year bearish descending triangle, so even with the rally off confusion at the FOMC, GNAT’s long-term momentum scores remain stable but relatively depressed while short-interest remains high, offering a potentially better risk/reward set-up than XLE.
For those out there who like volatility, the miners might be a good place to put capital to work. The sector has been hammered during the last four years and like the broader natural resources sector, assets have only recently begun to find their way back again.
Thanks to the Fed and general uncertainty as the bull enters its seventh year, Market Vectors Gold Miners ETF (GDX) pulled in 1.02 billion in the first quarter, helping it put in a double bottom at $18. Short interest has come down but remains relatively high. If you’re committed to being early to a trend, try GDX’s much-smaller cousin, the Global X Silver Miners ETF (SIL).