Recent Correction Offers Opportunity in USO

USO has been quite volatile the last ten trading sessions, making an incredible run up from its lows of $27.73, all the way up to $38.75 for an impressive 40% jump. It has since retraced about 50% of that rally, as it quickly stumbled back down to $32.37. The shares had simply gone up too much, in too short of a time, and needed a healthy correction, and that is precisely what the selloff delivered. The subsequent drop allows those wishing to go long, the chance to do so without having to chase the shares higher. It was certainly encouraging to see the shares close almost 4% above their Friday intraday lows.

Another rally in the works: The fundamentals are improving. There is less exploration occurring, and decreased production transpiring. Fuel usage will soon increase, as it is human nature to want to take advantage of lower gasoline prices. I don't know about you, but with gas so cheap, I feel the urge to drive as much as possible in order to exploit the situation before the window of opportunity vanishes.

World tensions easing? Although Israel's offensive against Hamas is near completion, the probability of another international incident developing is just around the corner. The bottom line is, demand will again outstrip supply.

My bonehead mistake: I admit it, I screwed up big time. I purchased 300 shares of USO at the very hefty price $115 per share. The purpose of the purchase was to hedge an airline position I had built up in UAUA, JBLU and DAL. My thought was, at least I could offset some of my airline losses on gains in USO if crude continued to rise. Although I eventually came out ahead on my airline positions, I never did bail on my USO holdings (ouch, bought on margin). I did the exact opposite of what a good investor is intended to do - I bought high (it wasn't the first time nor will it be the last time). I must be a glutton for punishment because I am still holding the shares - I guess since I bought high, I didn't want to magnify my mistake by turning around and selling low. You get the drift.

Warren Buffett's rule: The Oracle of Omaha's philosophy is to be greedy when others are fearful and fearful when others are greedy. This saying makes complete sense, because how else are you supposed to buy low and sell high? The fact that USO's outlook is saddled with such negative sentiment solidifies the truth that its tracking commodity is probably nearing an important turning point.

Bottom Line: USO has already seen a nice correction and most of its water has been extracted from its shares as a consequence. It might be the time to load up again, especially if the shares start to exhibit good relative strength. A ride back up to the $35-36 area by the end of the month, representing a cool 10% gain, is certainly plausible, while a one year price target of $60 is attainable.

Disclosure: Long USO.

Comments

[r davis:]

Mark,

Could you comment on USO vs DXO play? I've made some good money in DXO this month and wonder if there's a reason to hold USO instead. Thanks.

Jan 11 12:34 PM

[jepittman:]

It is refreshing to hear one own up to a trading mistake. Usually they all bought at the low and sold at the top - every time.

Jan 11 04:21 PM

[jepittman:]

You know you may have this pegged right but I'm still a little chicken. We are SWIMMING is crude oil right now and its still an open question whether ALL of these OPEC guys are going to actually go through with their cuts. While the US economy MAY be stabilizing (still not conclusive), its pretty clear Japan and Europe will lag us in recovery. Some think China has further to fall. Maybe. I'm in the 'lets hide and watch' camp for crude. At least for now.

Jan 11 04:27 PM

[dogsofmyhead:]

r davis -

I've been trading DXO between 2.75 and 3.00, usually having to double-down twice before taking profit. I find that I have the most success if I use my first buy on the 1x version, then if I am down more than 5% or so, I'll use DXO to double my position with half the cash (I trade in an IRA only). Since my first buy is usually wrong, I like to have DXO and ERX for my remaining cash. I use the same basic strategy with SH, SDS and FAZ...

I find the 1x first buy keeps me out of a lot of trouble.

Jan 11 08:24 PM

[nym:]

I assume you considered selling some USO and airlines so that you could write off the gains against the losses.

Jan 11 10:04 PM

[adan:]

re dxo, i've read there's potential problems with etn's vs etf's, i don't know enough to know how valid what i've read of that is

so, supposedly, dig, a 2x etf is better

but now there's articles re how the double etf's don't work like people think they might, ie, good for trading, not for holding

but sounds like mark's uso sure got whacked in proportion to the decline from very high...

mark, maybe a follow up article re your thoughts on single, double, multiple etf's and etn's?

liked your candor re your position too; reminds me of some of the open up-front writing on minyanville

thanks!

Jan 11 11:15 PM

[Mark Krieger:]

DXO vs USO...HMM...this is the first time i have heard about DXO.therefor i am quite ignorant on the subject...however it looks much more risky than USO becuase of it low price and huge range, but more risk has to carry a potentially higher reward.Sorry I couldn't offer more..Mark


On Jan 11 12:34 PM r davis wrote:

> Mark,
>
> Could you comment on USO vs DXO play? I've made some good money in
> DXO this month and wonder if there's a reason to hold USO instead.
> Thanks.

Jan 12 02:25 PM