Concerns about slowing global economic growth have pressured oil prices throughout 2019. As a result, energy stocks, which typically follow the commodity's performance, take the unenviable mantle for the stock market's worst-performing sector so far this year – returning a puny 0.94% compared to the broader market's 18.49% gain.
However, growth worries eased somewhat Friday after news of a partial trade agreement between the United States and China – dubbed phase one – began to emerge after two days of high-level meetings. The initial deal includes Washington halting tariffs on $250 billion worth of Chinese goods in exchange for Beijing purchasing an additional $40 billion to $50 billion worth of U.S. agriculture products as well as giving up ground on technology transfers.
Crude oil prices also received a boost on reports that an Iranian tanker had suffered damage caused by a missile attack off the coast of Saudi Arabia. The incident comes less than a month after a drone attack on a key Saudi oil facility led to a major disruption in global oil output, reminding investors that geopolitical risk in the region remains high with the potential to send oil prices skyrocketing at short notice.
"Obviously this [Friday's] jump was far less than the one we saw after the Saudi oil installations were attacked," PVM Oil Associates analyst Tamas Varga told The Wall Street Journal. "But nevertheless, it's still a stark reminder that the Middle East is anything but a peaceful part of the world. I think the price reaction is quite logical," Varga added.
Those who want to position for higher oil prices in the days and weeks ahead should consider trading these three energy exchange-traded funds (ETFs) that provide exposure to some of the largest gas and oil companies in the United States. From a technical standpoint, each fund appears to be carving out a bottoming pattern near key chart support. Below, we review the metrics of each ETF and point out tactical trading opportunities.
Direxion Daily Energy Bull 3X Shares ETF (ERX)
With net assets of $293.89 million, the Direxion Daily Energy Bull 3X Shares ETF (ERX) aims to return three times the daily performance of the Energy Select Sector Index – a benchmark that consists of U.S. large-cap energy companies, primarily in the oil, gas, and consumable fuels industry. The fund, through its use of leverage, suits active traders who want an aggressive bullish bet on leading energy names like Exxon Mobil Corporation (XOM) and Chevron Corporation (CVX). A narrow penny spread along with ample daily turnover of more than 2 million shares helps to minimize trading costs and slippage, while the ETF's 1.09% expense ratio sits in line with other funds that use derivative products to achieve geared returns. ERX offers a dividend yield of 1.80% and has fallen 66.31% this year as of Oct. 14, 2019.
A possible double bottom appears to be forming on the ERX chart at the $12.70 level, with the area also finding support from the 2018 bear market low. Those who take a trade should think about setting a take-profit order near $19, where price encounters resistance from the September swing high and 200-day simple moving average (SMA). Limit downside risk by placing a stop underneath this month's low at $12.90. The trade offers a favorable risk/reward ratio of almost 1:3, assuming a fill at Friday's $14.49 closing price ($4.51 profit per share vs. $1.60 risk per share).
iShares U.S. Oil Equipment & Services ETF (IEZ)
The iShares U.S. Oil Equipment & Services ETF (IEZ) has an investment objective to track the performance of the Dow Jones U.S. Select Oil Equipment & Services Index. Its top 10 allocations, in a basket of 37 holdings, carry a combined weighting of over 70%, making the fund relatively concentrated. Houston-based energy equipment giants Schlumberger Limited (SLB) and Halliburton Company (HAL) command the top individual stock allocations at 21.64% and 17.12%, respectively. The 13-year-old ETF's middling 0.42% management fee allows swing traders to carry a position for several weeks without paying absorbent holding costs. Meanwhile, dollar volume liquidity of roughly $1 million and an average three-cent spread also cater to shorter-term strategies. As of Oct. 14, 2019, IEZ has assets under management (AUM) of $81.89 million and yields 2.43% but has disappointed on the performance front, dropping 55.04% year to date (YTD).
IEZ's October low came within just eight cents of the late-August/YTD low before rallying 4% from the level in Friday's trading session amid the day's developments mentioned above. The move higher has the potential to create a double bottom pattern as short sellers buy to cover their positions. Traders who decide to go long should consider placing a stop-loss order beneath the 2019 YTD low at $16.11 and look for a move back to last month's swing high just below $21. Manage risk by moving stops to breakeven if price closes above the 50-day SMA.
ProShares Ultra Oil & Gas (DIG)
Created in 2007, the ProShares Ultra Oil & Gas (DIG) intends to deliver two times the daily return of the Dow Jones U.S. Oil & Gas Index. The $71.40 million fund provides traders with excellent exposure to Exxon and Chevron, given their respective weightings of 24.11% and 17.63% in the underlying index. A 0.95% annual management fee makes the ETF expensive to hold; however, trading costs are more important due to the fund's short-term tactical mission. On that front, DIG excels with its 0.07% average spread and daily trading volume of more than 150,000 shares. Like all geared funds that rebalance daily, longer-term returns may deviate from the advertised leverage due to the effect of compounding. As of Oct. 14, 2019, DIG has AUM of $71.40 million and is trading down 52% YTD. A respectable 2.70% dividend yield somewhat offsets the fund's disappointing return.
DIG's share price has found crucial support near two previous swing lows (December 2018 and August 2019). The relative strength index (RSI) gives a reading below 50, allowing price plenty of room to rise before consolidating. Traders who expect more buying this week should aim to book profits on a retest of $27, where the ETF runs into overhead resistance from the Sept. 16 high and 200-day SMA. Protect capital by positioning a stop either under this month's swing low or beneath the August trough.