How to Trade Oil This Month
By Jeff Clark
October 16, 2007
Along with Halloween candy, Pilgrims, and Rudolph the red-nosed reindeer, there are three things I count on showing up in the fourth quarter every year...
| 1. |
Bears in the diet company stocks. |
| 2. |
Bulls in the semiconductors. |
| 3. |
And a glut in oil and gas inventory. |
Nobody ever questions me on numbers 1 and 2. After all, it makes perfect sense that the weight-control businesses suffer during the holidays when no one wants to be on a diet. And semiconductor stocks move higher because, well, just about everything moves higher in the last quarter of the year.
But to expect a glut in oil and gas inventories just as the weather turns colder? That seems crazy.
But crazy has been profitable for each of the past six years. Take a look...
As strange as it may seem, oil prices have a habit of declining when the weather turns coldest. Chalk it up to the market's discounting mechanism. Oil prices rally in August and September in anticipation of cold weather in the winter.
When winter arrives, the market begins to discount warmer springtime temperatures and oil prices fall.
Oil company stocks don't demonstrate the same tendency, so there's no point in trading it from that angle. But, take a look at this chart of the U.S. Oil Fund (USO)...
There's no guarantee that oil prices will decline toward the end of this year. But it's happened in five of the last six years – the lone exception being in 2003, when oil prices dropped briefly but then rallied higher.
And if you believe as I do that there are a few too many bulls hanging out in the oil pits, then shorting a few shares of USO looks like a reasonable bet.
In fact, it's pretty tempting to short the diet stocks, buy the semiconductors, short USO... and then go to sleep until Thanksgiving.
Odds are that it'll be a pretty profitable nap.
Best regards and good trading,
Jeff Clark
