Exiting a Winning Trade in Energy

Focus: ETFS

Igor Greenwald Image Igor Greenwald Chief Investment Strategist, MLP Profits

The leveraged ETF recommended in May has paid off handsomely after swooning in June. There will be a better time to get back in, writes MoneyShow.com senior editor Igor Greenwald.

A little over two months ago, I recommended the purchase of a leveraged exchange traded fund, the Direxion Daily Energy Bull 3X Shares (ERX).

The timing seemed right. A week earlier, high-flying crude prices had suffered a “flash crash,” caused, in retrospect, by the Obama Administration’s plans to sell crude from the Strategic Petroleum Reserve.

The slump in oil prices, compounded by broader market weakness, had driven ERX down 22% month-to-date—this after its value had quadrupled over a ten-month span.

The day I recommended ERX, major oil company chiefs were testifying on Capitol Hill in defense of tax breaks Democrats had targeted for cuts.

In short, the timing seemed right to jump aboard a secular rally experiencing an overdue correction.

As I wrote at the time, a lot of speculative froth had been skimmed off the oil trade (and off the general market bullishness that had prevailed in April). Concerns about the economic slowdown were already rife, and headlines about a “commodity bubble” about to pop were everywhere. 

I did caution that ERX could still move considerably lower. I warned of the “sizable” risk, and the possibility that crude could fall to $90 a barrel (it would actually dip into the high $80s later in the month, before recovering.)

But on the flip side, the case for higher energy-sector share prices was (and remains) strong, with oil-company valuations at multi-year lows, and demand from emerging markets compensating for the modest dip in domestic gasoline consumption.

The day the column ran, ERX opened at $70 and change, traded as low as $67.37, and ended at $71.34, its lowest close in two months.

And then I spent the next six weeks wondering:

  • Whether oil was headed back down to $60 again as a result of the dreaded double dip;
  • How I could have been so dumb;
  • When I should surrender and apologize.

I wrote multiple columns arguing that worries about another recession and bear market were overblown.