Oil Stock ETFs See Reversal on Big Volume

Even with oil up nearly $5 yesterday, oil stocks sold off sharply towards the end of the day. Below we highlight two leveraged energy stock ETFs that saw their biggest one-day volumes ever yesterday on big price reversals. DUG is the Ultra (2X) Short Oil & Gas stock ETF, while DIG is the Ultra (2X) Long one. As shown, the inverse oil stock ETF (DUG) was up yesterday while DIG was down.

We put out a note to Premium members earlier highlighting that this is the first time since February 2005 that energy stocks were down more than 1% while oil (the commodity) was up more than 3% on the day. Does yesterday's selloff in energy stocks signify the start of rotation out of these names or just one day of profit taking?

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Comments

[Wez]

What triggered a DUG purchase for me was a ton of smart money talking heads and publications are starting to say how they think oil is going to $150 - $200. They could be right, but whats the saying, sell when most are buying and buy when most are.......

[Kunst]

So when the "smart" (hot) money decides to take its profits from the huge run-up of oil, what's the next target? The stock market has been going up with oil. If a bunch of money exits oil and other commodities, does the market go up even more?

[Kunst]

Mr. Hudlow: that's all very nice, but what does it have to do with anything here? Did you paste in the wrong place?

[buyitcheap]

This is a classic technical reversal, you've got big profit taking which is just a temporary downmove in a much bigger move up. We are approaching June, and the whole sell in May go away "thing" any PM worth his/her salt should lock in profits at this level. DUG is a great play for the next few weeks IMHO - long DUG.

[oil myth]

Oil prices will correct in near future. Today's pullback might signal a shift in the trend as it confirms that the price spike has been primarily due to speculation since the pullback happened in the absence of any demand/supply news. If oil continues to rally higher from now, it will send a clear signal as to the speculative nature of this rally and might result in some kind of regulatory intervention by the government. Also, my guess is that the Fed will hike rate in June as inflation is now the primary concern which will give a floor to the dollar and then more importantly, we find that Obama is the presidential nominee in June as well. Once that happens, I guess the current fed machinery will gear their strategy keeping in mind the new boss in the office next year and we already know the radical changes coming when Obama becomes the President.
To summarize, I guess the oil rally is over and there are strong downward pressures for commodities going forward.

[Kunst]

DCR is a cleaner short of oil. DUG is an oil industry stock index.

[fxtrader07]

DCR IS NOT AN OIL-SHORTPLAY ANYMORE!!

@Kunst: DCR is worth more or less zero. It is going to get liquidated in a few weeks because oil traded for more than three consecutive sessions above 111$/barrel, triggering the liquidation event. so unless you expect oil to fall below 110$ over the coming few weeks when the actual liquidation of dcr will take place you will lose 100% ion DCR. there are plenty of articles on sa regarding dcr and the liquidation issue.
and if you really want to play on crude falling below 111 by june or july buying outright put options on the nymex will be the cheaper play

[yank]

Dear oil myth:
Sorry to burst your bubble but we have "many miles to go" before this commodity bull sleeps. A few facts to correct your misperceptions:
1. You say oil's recent rise has occurred in the absence of any supply demand news? I guess you missed this week's "memo" from the IEA which sais oil supplies will be considerably lower going forward. You may also have missed this little tidbit; Nigerian oil production has DECREASED 25% over the past two years. Not to pile on but I also read this week that China's oil imports this year have increased 32% over last year (this number was reported before the recent devastating earthquake which will almost certainly raise the number even higher).
2. As for the prospects of a rate hike in June, all I can say is what drugs are you taking? There is ZERO probability of that happening. Most respected economists agree that once the Fed finishes its easing cycle (may or may not have happened yet), the full effects of the easing are not felt for at least 9-12 months. Translation: Don't expect ANY possibility of a rate hike until the end of the 1st quarter of 2009 (at the earliest).
3. Let me conclude by stating that you are obviously unfamiliar with the work of Jim Rogers. Rogers has very clearly stated that this commodity bull market will last at least another 10 years.

Dream on about lower oil prices, an Obama presidency, etc......
Because that's all they are. Dreams.

[Wez]

Oil myth:

www.npr.org/blogs/chen...

What demand news were you looking for again?

[chazz]

Since 'yank' decided to berate 'oil myth' with nebulous facts on oil, I feel it necessary to throw out a few more 'stats'. First, just pull up the latest info on driving habits and you'll find that for the first time there was a fair sized decline in vehicle miles (U.S. motorists, who are paying record prices for gasoline, drove 4.3 percent less in March for the biggest monthly drop ever, a government estimate showed. The decline in vehicle miles traveled was the first for March since 1979, when Iran cut oil exports, the Federal Highway Administration said today in a statement.). To add to this, 'yank' might want to check on the 'open interest' stats for crude oil contracts (The number of outstanding futures contracts, known as open interest, fell 8.1 percent in a week to 1.36 million at the same time that prices rose 2.6 percent, the data show. Falling open interest and rising prices are signs that traders are buying to exit so-called short positions that would profit if oil fell, and lose money as they rose). This is significant in that it's the 'throw in the towel' shorts buying back their contracts from the 'smart longs'...

Ok, maybe that's not enough to combat the somewhat tepid arguments so how about 1) Floating Storage (sometimes shows up in Oil Stats a week or two late and maybe the reason why Iran for one has booked twice the normal amount of oil freighters...maybe they have nowhere to put the oil), and 2) there's actually more demand created by the number of long index funds purchasing ETF's like USO, OIL, etc...

So, when you make specific and DEFINITE claims like "ZERO probability" and 'ANY' possibility, those are the kind of bravado comments that the intelligent investors will capitalize on (those same guys that sold the Nasdaq when everyone and their taxi driver were talking about how they couldn't lose buying internet stocks...funny how this same phenomena is happening again but with oil this time). So, maybe the 'dream on' comment is a bit much...hyperbole, much like the chart of oil itself.

[Shaggieman]

Three new pieces of info for Yank are:

1) Iraq's oil reserves raised to 350 billion barrels last week. I would love to see the Iraqi's step up and ride to our oil shortage problems. They could do it with our help and we'd be indebted to them. Maybe wishful thinking.

2) China and several other Asian countries announced they're ending energy subsidies. This means most will no longer be able to afford consuming energy.

3) China is doing an Olympic shutdown starting June 1, to clear the air for the Olympics. Shut down of steel mills and all businesses that pollute two months prior to start.

[Kunst]

fxtrader07: I bought DCR at $0.91 on 5/22. I closed at $1.25 today (5/29). Yes it is going to die on June 25, but it is still being traded. It has a non-zero value then if oil is below $120, not $111. Yes, it is essentially a short-term put on oil. I have stop losses in place and I think there is considerable upside potential.

[blink0404]

If the price of oil continues to decrease, DUG will become more and more pro fitable.

I found this piece on market catalysts quite imformative. It talks about more than just DUG; also GLD, TLT, and TBT. Worth a read if your trying to play in this market.

www.greenfaucet.com/fa...