Trading Oil Into The Holiday Weekend: Long or Short? (USO, OIH)

The question, or suggestion, was posed to me last week that it might be good to be long oil, in any of the various ways that’s possible, in case something such as a hurricane might hit and send prices rocketing higher.

It sounded like a good idea to me until last Friday, when I heard a commentator say that no one wants to be short oil going into the weekend in case something happens. Everyone that wants to be long now is already long, awaiting the eventual travesty.

Typically in such a trading setup, what happens when everyone is anticipating the same event is that when the event eventually does occur it triggers a spate of profit taking. But at first the event may also bring in new money, so there’s this back and forth chaotic tug of war between the profit takers, the momentum traders trying to jump on the bandwagon to ride what they think will be a wave up to a new higher level for prices, and short sellers entering the market at various points thinking prices are too high.

The end result of all of these players interacting together simultaneously is mostly erratic price behavior that no technical chart pattern can predict. At different points in time there are varying degrees of each of these various market players. There are times when everyone seems to want to be long and stay long. There are other times when everyone will seem to think that with one or two shocks out of the way, the probability is then lowered for another and they will then be apt to short the market. Then, in years of large-scale problems like Katrina, traders become very fearful of another event. This ebbs and flows over time.

Such circumstances only serve to trap the average trader and fleece them of their money taking out stops in both directions, thus feeding the guys down in the pits that prey in part on the naivety and emotional reactions of those on the outside drawn in by the magnetic excitement of the crowd, like bugs to a bug zapper. The only thing sure about this kind of trade is that the majority of traders making it will gradually bleed to death, blow up, or learn their lesson and move on.

In trading any event that is well-known and predictable, like hurricanes in the summer, that event is going to present a history of price action associated with it, that traders specializing in a particular market will have studied. Only they will know what the wise trade is. When many traders have the same information the result is that the impact on prices tends toward randomness as many traders come in with many different strategies all trying to outdo each other. That’s a situation I’ve learned the hard way to just leave to others.

It reminds of the hunt for powder. I live in Keystone, CO very near to the ski resort of the same name. On big snow days I will sometimes sneak out for a few hours when I can. The vast majority of skiers on these days head straight for the farthest reaches of the resort all in kind, thinking that that is where they will find the best powder and have it all to themselves for a time. Keystone’s lift capacity is 32k skiers per hour. That’s hundreds, or thousands, of skiers all heading for the same say 20 or so trails, which get ‘tracked out’ within a half hour of opening.

I have learned that the best place to ski pure, unmolested powder longer into the day is overlooked right in front of most people’s eyes on the front mountain where the beginner tourist skiers are falling, flailing, and floundering in the deep stuff. I float by, hitting all the untouched more difficult terrain the ski tourists are too afraid to attempt.

I think the markets are similar. Look out when everyone's thinking the same thing you are.