Contrarian Alert—Big Spike in Short Interest in Energy Sector

02/13/2015 7:00 am EST

Focus: STRATEGIES

A lot of investors are extremely bearish on Energy right now, and given the plunge in oil prices, the pessimism is understandable, but the staff at BespokeInvest.com points out that if oil prices do start to stabilize, or even rise, there will likely be a major rush to get out of these bearish bets.

Short interest figures for the end of January were released after the close Tuesday.  There were a number of noteworthy aspects to this month's report, but the one that sticks out the most has to do with the Energy sector (XLE).  As of the end of January, the average stock in the Energy sector had 9.88% of its floating shares sold short.  As the chart below illustrates, this is the highest level of short interest for the sector since at least 2008.

chart
Courtesy of bespokeinvest.com
Click to Enlarge

The fact that average short interest levels in the Energy sector are approaching 10% is noteworthy, to say the least.  It's safe to say that in the Energy sector, we haven't seen these levels in at least a decade, and for the market overall, the only time we saw double-digit levels of short interest for any sector was back during the Financial crisis.  Needless to say, a lot of investors are extremely bearish on Energy right now, and given the plunge in oil prices, the pessimism is understandable.  However, if oil prices (USO) do start to stabilize, or even rise, there will likely be a major rush to get out of these bearish bets.

By the Staff of BespokeInvest.com

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