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Summary Investors are turning increasingly bearish on energy sector stocks. Short interest in energy companies is rising. Energy ETFs may be a good contrarian play to capture any potential upside. In the coming days ahead, short-term swings could make or break the energy sector-related exchange-traded funds, as short interest on oil stocks rise to a seven-year high. The Energy Select Sector SPDR ETF (NYSEArca: XLE ) , which tracks energy companies from the S&P 500 index, has declined 8.6% over the past three months, but is slightly up 0.2% year-to-date. As of the end of January, the average energy sector stock had 9.88% of its floating shares sold short, the highest level of short interest for energy stocks since at least 2008, according to Bespoke Investment Group . The close to double-digit short interest reflects growing concern for the energy sector. To put the percentage of short interest into perspective, the only time the markets saw double-digit levels of short interest for any sector was during the global financial crisis. Short interest reflects the percentage of shares outstanding that investors have sold short, but not yet covered or closed out. It provides a gauge of market sentiment, revealing investors’ bearish outlook on the market. However, given the high amount of shorts, a positive turnaround in oil prices could easily fuel a quick rally. For instance, a contrarian investor would benefit from a sudden short squeeze as pessimistic traders rush out of bearish bets if the market turns bullish. “By the way, according to our contacts on the Street, there is an inordinate amount of ‘Street Buzz’ going around that there is so much short selling in energy stocks being done by hedge funds that some stocks are becoming hard to borrow,” NYSE floor governor Rich Barry told Business Insider . “It is a hugely crowded trade at the moment.” West Texas Intermediate crude oil futures rose 4.9% to $51.2 per barrel on Thursday, while Brent crude oil futures increased 5.0% to $57.4 per barrel. XLE was up 1.2% Thursday. Energy Select Sector SPDR Fund (click to enlarge) Max Chen contributed to this article . Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article. Scalper1 News
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