Academic Trading Strategies (XLE, USO, XLF, FXU)

Did you ever wonder what university professors really do?

Here’s an article that explains what most of these clowns are really up to.

You’re not going to believe it.

When they’re not writing treatises on “15th Century Sock Weaving Techniques of the Women of Argonne”, well-paid academicians are busy quantifying the likelihood of the world ending in this manner or that.

You don’t believe me? Click here.

Here’s a brief quote from the article for those who don’t have the time –

“This is a scientific assessment about the possibility of oblivion, certainly, but even more it is a call for action based on the assumption that humanity is able to rise to challenges and turn them into opportunities.”

ridiculous

Sorry to say it, but the academic world is now either so lost in the minutiae of the mundane and unimportant, or so arrogant as to imagine that the quantification of a conclusion that’s anything but a certainty is within their grasp.


Hopeless

 

Leave it to the so-called ‘scholars’ at Oxford University’s pretentiously named ‘Global Challenges Foundation’ along with fellow quacks from their ‘Future of Humanity Institute’ to find new and creative ways to draw attention to themselves and secure more money for additional nonsensical fantasizing.

And by the way, you can be sure that the goal here is to involve governments (from which they draw their funding) to begin to address these tremendous ‘risks’.

Heaven help us.

Bottom line on academics is this – don’t trust ’em. They contain, as a group, some of the most deviant and narcissistic band of louts you’ll ever meet.

plague


It’s Academic

 

We’re going to close a position that we opened two weeks ago in a letter called Underground and Behind the Scenes, where we advised you to initiate a long/short effort that pitted the Financials against the Utilities. Specifically, we wrote –

“Over the last two months… the worst performing sector in the S&P 500 was the financials. Among the best performers were the utilities. It makes sense to us to match these two against one another, looking for a stronger performance out of the financials than the utilities in the event of a market rebound. Why? First, because utilities are seen as a safe haven in times of market trouble. And second, because corporate growth and economic expansion are always more closely tied to the financials than any other group of equities.”

We bought the Select Sector SPDR Financial ETF (NYSE:XLF) for $23.38, and sold the First Trust Utilities ETF (NYSE:FXU) for $25.30, for a total credit of $192 per board lot traded.

And look what happened –

fxuxlf

The chart shows exactly how timely the trade was.

As of last Friday’s close, XLF had nearly overtaken FXU and was trading for $24.43. FXU itself declined sharply, and now sells for $24.58.

Sell the former and buy back the latter for a mere $15, and you have a profit of $177 for every round traded. That’s an 1180% return, friends ($177 on $15 laid down).

And that’s a pretty good haul.

99 Barrels of Crude on the Wall…

 

As the subtitle implies, we want to talk about oil now and show you a chart. You saw most of this last week, though we’ve updated a few items to make it current.

It’s six months worth of daily trade on the United States Oil Fund (NYSE:USO), and it looks like this –


uso217

There are a great number of points to discuss here, but let’s just say that the overwhelming technical evidence at this stage points to either:

1) A strong counter-trend rally that could lift USO towards the 137-day moving average at the brown hexagon, thereby also filling the gap that was created in late November (red circle). That’s a move of some 35% to 40%, and it’s certainly playable.

OR

2) A full-on change in the intermediate trend, with an assault on former highs at $40 expected sometime over the next twelve to eighteen months.

Either way, it looks good.

Now for the details –

For starters, we saw a deeply oversold RSI reading in mid-December (blue circle) that corresponded with a deeply oversold weekly RSI read at the same time (not shown here). Sub-20 readings are often followed by a bounce of short to medium term duration.

Subsequent to that, RSI and MACD began trending higher, diverging from price and indicating to all who cared to notice, that the selling was losing momentum (red lines). Also bullish.

All the while, we saw a massive expansion of daily average volumes, from less than 10 million shares per day to over 30 million (in black), a textbook sign of a ‘capitulation’ bottom.

And in the last few days, we’re seeing price ‘scooped’ by the short term moving average (in green), as well as a flag formation (blue lines) following the ultimate bottom at the end of January. The flag is a continuation pattern, i.e., from the bottom to the flag, and from the flag higher.

In other words – the technicals for oil are very promising.

But we also like the horrible sentiment numbers for the sector.

As the chart below shows, the average energy sector stock has close to ten percent of its float shorted.

highestread

That’s the most negative (we say ‘positive’) read for the sector in at least seven years. It also means there will be a whole lot of buying should oil get a bit of a rebound here.

How To Play It – Our Trade

 

Indeed, the latest nudge upward for oil has resulted in an outsized move higher for the Select Sector SPDR Energy ETF (NYSE:XLE). And that’s where we’re playing our cards this week.

We’re going short the commodity and long the oil companies themselves in an attempt to profit from the latter’s outperformance. Specifically…

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Options Trader Elite recommends you consider 1) closing down your long/short XLF/FXU position, as detailed above, and 2) purchasing the XLE December 31st 100 CALL for $0.91 and selling the USO January 15th 26 CALL for $1.00. Your credit on the trade is $0.09 per pair traded.

 

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Options Trader Elite recommends you consider 1) closing down your long/short XLF/FXU position, as detailed above, and 2) purchasing the XLE December 31st 100 CALL for $0.91 and selling the USO January 15th 26 CALL for $1.00. Your credit on the trade is $0.09 per pair traded.

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With love of the hunt,

Hugh L. O’Haynew, Senior Analyst, Normandy Research

See what people are saying...

  1. Jim Rodgers

    Being new to options trading and trading in general, what would be a realistic amount to dedicate to the above trade on a 100k account?

  2. Stephen Dietrich

    Jim,

    I’m not a financial advisor, so I can’t really say how much is appropriate for you to dedicate. I’d say, first, talk to your broker. After that, figure out how much you’re willing to risk (and lose), versus how much you believe in the trade idea.

  3. Jim Rodgers

    Stephen,
    Thanks for the advice. I was just curious on the above trade that Hugh outlined, $.90 credit per pair traded, how many pairs would a person trade compared to their capital to invest. What do you have to lose on that trade anyway?

  4. Hugh L. O'Haynew

    Hi Jim,
    First, let me say how honored we are to have such an august and renowned investor amongst our readers. As to your question, our general rule is that unless we post otherwise, we commit anywhere between 1-2% of our total portfolio value to any given trade.
    Happy day, brother!
    Hugh

  5. Jim Rodgers

    Well Hugh, undeserved flattery will get you everywhere and I do appreciate you taking the time to answer my question. Being such a ” renowned investor ” ( ref tag above!),
    I have three questions,
    1. Am I correct that there is no risk on the USO/XLE trade?
    2. Would 25 per side be a reasonable position?
    3. Is the trade still viable to take ?
    Hugh, I did enjoy your articles on Options 101. Hope you’ll do some more and throw in your advice on education for a beginner.
    Thanks,
    Jim

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