Oil vs. the Market: Major Changes Expected This Month

The market continues to react to declines in oil prices, and it will almost surely continue to do that until such time as OIL seems to be a non-issue again.  This will only happen when oil dips below a level perceived by the market as 'economically neutral.'  That level, in my opinion, is $100.

My downside target for oil has been and continues to be slightly below $100.

The buy I recommended in the UltraShort Oil & Gas ProShares ETF (DUG), and the Outright shorts that I suggested for oil itself both had that target, as did prior UltraShort Oil & Gas ProShares ETF (USO) recommendations.

Review my commentary on the Money Show if you are interested in verbage specific to Oil, Energy Select Sector SPDR ETF (XLE), DUG, USO, and OIL (iPath S&P GSCI Crude Oil Total Return).

With that understood, I expect the market to continue to react positively as oil prices decline.  Once oil dips below $100 I expect the market and oil prices to diverge from their inverse relationship again, at least for a short while as well. 

In fact, given the corresponding increases in the market that I expect in relation tot he decline in ol prices, I also expect greed to come into the market again at that time and I expect that tailwind to propel the market into overbought conditions.

This will be another prime shorting opportunity in my opinion.  The down-leg that comes into the market next time will be extremely painful and Buy and Hold investors will have their heads handed to them.  Proactive trading strategies are the only way to make money in today's market environment. 

I expect the decline in oil, the increase in the market, and the divergence referenced above to come to fruition by late August - Mid September.  Short opportunities should present themselves at that time too.

Disclaimer:  You can lose money by investing in stocks.  Past performance also does not guarantee future results.  Do not attempt to invest in any trading strategy without first consulting with your trusted investment advisors.  The type of trades made in this strategy should be deemed to be aggressive in nature and they are intended to be used by persons who believe that aggressive trading suits their personal risk profiles only

Comments

[investor88:]

A logical article here. Worth following the arguments.

2008 Aug 10 05:53 AM

[Gigem77:]

If oil keeps dropping 3-4 dollars per day, your 100 target will be hit in a week. I think we saw the bottom Friday, but if the market ignores bombed pipelines, we could see 110.

Buy and hold investors have had their heads handed to them for 8 years unless they were long commodities and even those have had some sharp corrections. It's definitely a traders market.

Doug Noland writes a good piece on leveraged speculators, at the end of this page. His insights on dislocation in the markets are worth the long read. www.prudentbear.com/in...

2008 Aug 10 08:54 AM

[athenian:]

I'm curious about the performance of DUG relative to OIL in the last week. OIL dropped 8.2% but DUG increased just 8%. It should have been closer to 16%. The action on Friday was particularly noticeable. OIL declined by $2.88 relative to the close on Thursday but DUG increased only $0.81.
What do you think was happening here?

2008 Aug 10 10:26 AM

[Gigem77:]

DUG is an ultrashort fund that tracks the DJUSEN index. It shorts the shares of energy companies. It does not short oil. To short oil you need a fund that actually shorts futures like DTO.

2008 Aug 10 11:37 AM

[mjaniec:]

Actually it seems none pipelines were bombed during the recent conflict in Georgia. Russian fighters bombed area close to the BTC pipeline but the pipeline was not hit. Also, it seems none significant damage was done to Georgian oil terminals. Poti port was bombed but the Kulevi oil terminal is located a dozen or so kilometers from the port.

2008 Aug 10 12:48 PM

[FourBrane:]

mjaniec: "the recent conflict?" What a relief. I guess the war is over.

2008 Aug 10 03:57 PM

[athenian:]

gigem77...thanks. Looks like I should have done more dd before I bought DUG.

2008 Aug 10 06:05 PM

[Chubbs:]

There are an awful lot of people calling for the collapse of the world economy. And if it doesn't? There sure are a lot of people bearish on oil. Meanwhile at this moment 3 tropical waves are on their way from the Cape Verde Islands headed for North America.

2008 Aug 10 11:56 PM

[mangolfer:]

Good article. I agree with support probably coming around oil at $100.

2008 Aug 11 07:12 AM

[buyitcheap:]

With all this agreement at $100 or below (me included), should we regard this as contrarian indicator?

2008 Aug 11 09:32 AM