Economic concerns are once again taking their toll on the energy sector. Following a wave of less-than-stellar reports on the U.S. economy, including the June nonfarm payrolls report, crude futures have taken a nosedive. Specifically, the price of crude oil has plummeted nearly 20% in less than a month, falling from its June 11 high of $73.90 per barrel to below $60 per barrel on July 10. What's more, the U.S. dollar has gained safe-haven appeal amid this renewed economic uncertainty, further impacting crude oil and energy prices.
The situation has certainly taken its toll on the Select Sector SPDR Energy Fund (NYSE: XLE). The exchange-traded fund (ETF) set a near-term peak on June 11, at the same time that crude oil prices peaked. Since that time, XLE has shed more than 16%, finding resistance at its falling 10-day and 20-day moving averages in the process. Furthermore, the fund has also slipped beneath the upper rail of its September 2008-through-May 2009 trading range.
From a sentiment perspective, investors remain quite bullish toward XLE despite the weakening price action. For instance, more than half of the 874 analysts' ratings on oil sector stocks are "buys." Comparatively, only about 8.6% of those ratings are "sells," leaving ample room for potential downgrades that could send XLE sharply lower as a result.
Within the energy sector, Petrohawk Energy Corp. (NYSE: HK) looks particularly vulnerable to an extended decline. Since peaking near $27 per share in early May, the stock has fallen more than 24%. What's more, the losses have mounted in recent weeks, with HK fighting a losing battle with its 10-day and 20-day moving averages. The stock is currently attempting to reclaim potential round-number support in the 20 area, but short-term resistance in the 20.50 region is hampering the equity's rally attempts.
Despite the degrading price action, analysts remain heavily bullish toward HK. Specifically, 10 of the 14 analysts following the shares still rate them a "buy" or better, according to Zacks, with nary a "sell" rating to be found. Furthermore, Thomson Reuters reports that the average 12-month price target for the equity rests at $30.93 per share, a premium of more than 56% to HK's Monday close at $19.79 per share. These factors should be a concern for contrarian investors, as it leaves ample room for potential downgrades or price-target cuts.
Options traders are equally as bullish. For instance, the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.19 indicates that calls more than quintuple puts among options with less than three months until expiration. This ratio also rests just 10 percentage points shy of an annual low, meaning that short-term options traders have rarely been more bullish toward HK at any other time during the past year.
Heavy call activity is also evident in data from the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE). During the prior two weeks on these exchanges, options traders have bought to open an impressive 28 calls for every one put. The resulting 10-day ISE/CBOE call/put volume ratio of 28.48 ranks above 99% of the past year's worth of readings, meaning that investors have bought call options at a faster rate on these exchanges only 1% of the time in the past year.
Checking in with short sellers, we find that the number of HK shares sold short dropped by nearly 16% during the most recent reporting period. Still, this influx of buying pressure has had little impact on the equity's price action, suggesting that selling remains dominant for HK. Should the bears cease taking profits and return to the table, we could see the added weight of renewed short selling pressure the equity even lower.
Disclosure: Joseph Hargett has no financial interest in any of the equities or products mentioned in this column.
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