XLE Short Cover Continues, but Bears Haven't Left

XLE ends the week with short sellers still in retreat — but the pace of covering has slowed, and the ETF itself is cheaper than it was when the exit began.

The covering trend flagged in last week's convergence note has continued. Short interest fell another 14.2% on the week to 54.4 million shares — 18.1% of the free float. That extends the pullback from the late-May peak of 68.9 million shares, where bears had built a substantial position. On a month-over-month basis, shorts are down 15.5%, a meaningful reduction. The daily history shows most of the week's activity happened at the front end: short interest was still 62.3 million shares as recently as June 24, then fell sharply across the back half of the week. That timing matters — bears added briefly at the start of the period before reversing course again.

The borrow market has loosened further, consistent with the covering. Availability is now 135% — more shares available to borrow than are currently lent out — a dramatic turnaround from the 10% floor touched in late May. Cost to borrow has also eased, dropping 26% on the week to 0.64%, after briefly touching above 1% in mid-June. The 52-week low for availability was 9.8%, meaning the lending pool is now in a genuinely comfortable range relative to where it spent much of May. That loose availability removes the mechanical squeeze pressure that was building when the borrow market was tight.

Options positioning offers a counterpoint to the short covering story. Put/call ratio is running at 1.47, modestly below the 20-day average of 1.57 — about 1.4 standard deviations lighter on puts than the recent norm. That is the least defensive options posture XLE has seen in at least a month, as the PCR has drifted steadily lower from the 1.73 reading on May 26. Options traders appear less worried about near-term downside than they were four weeks ago. The 52-week low on the PCR is 1.35, so even at 1.47 there is room for further de-hedging if the macro backdrop holds.

The price action complicates the narrative. XLE closed at $53.11 on Tuesday, down 2.5% on the week and 5.6% over the past month. Bears who built positions from the mid-$50s or higher are still in profit on a price basis, which may explain why covering has decelerated rather than accelerated — there is less urgency to exit while the short thesis continues to pay. The short score of 58.9 sits roughly in the middle of its recent range, having drifted down from a 63.1 peak on June 17. That modest easing aligns with the covering trend but does not signal anything close to a bearish capitulation.

The setup heading into July is therefore one of gradual normalisation rather than resolution. Short interest remains elevated at 18% of the float — still a high absolute level even after a 15% monthly decline. Availability is loose, cost to borrow is low, and options traders are hedging less aggressively. What to watch is whether the covering continues at this pace or stalls out: if short interest stabilises around 54 million shares while the price continues to slip, it would suggest bears are comfortable holding rather than rushing for the exit.