Misfits and Oddities (GDX, FB, XLE, USO)

A happy and prosperous New Year to all our dear readers and fans – may 2015 mark for you and your loved ones a year of feasts and plenty, health and happiness, and remember, too, at this time next week we’ll review our midyear predictions and award one all-expenses-paid, one-way ticket for two to Atlantis, courtesy Malaysia Airlines.

sicko

Oh…?

Try this, then…

boil

Before we dig into the meat of this 1st letter of the New Year, we’re going to conduct a very simple poll, and we urge one and all to participate.

It consists of one question, and it goes like this –

Six months from now, do you expect the Dow to be
higher or lower than it is now?

 

We’ll tally the numbers to determine just how optimistic you are as a group, and then report back to you on, say, the 4th of July to see how you did.

Feel free to add a word or two on why you feel the way you do – e.g., “Higher, the Fed” or “Higher, economic expansion” or “Lower, Obamacare” or “Lower, Republicans/Democrats”, etc.

Just please keep it brief.

And now we hit the bid.

 

We’re going to start today’s letter with the curious and the bizarre, two qualities that – unbeknownst to most – regularly lead to ginormous profits.

Consider the following –

The price of oil has been in a freefall for the better part of six months. Over that time it has lost half its value.

In light of that, one would expect those companies involved in the oil trade to also be experiencing losses – and indeed they have, though not to the same degree as the commodity itself.

Nothing weird and wacky yet.

Where things get strange is in the recent action of the drillers and marketers, whose collective behavior against oil’s ongoing decline has been… that’s right, to climb steeply!

No joke. Take a look at the chart below that matches just the last three months trade of the United States Oil Fund (NYSE:USO) against the Select Sector SPDR Energy ETF (NYSE:XLE).

usoxle
Take it on our word that prior to the action seen above, the two had marched more or less in tandem.


So what is this!?

 

As the chart shows, the connection between the two issues broke in mid-October and the two have increasingly drifted apart ever since.

And we’re left wondering whether the drillers still have to pay the piper, or crude is set to bounce? Who’s the leader and who the laggard? Who, in other words (besides McAbby), is the PROPHET!?

profit
Ahem, think you.

We say it doesn’t matter who’s what here, though we certainly have our opinion (that the oil companies lead the commodity). Why? Because either way, we can win by matching the two in a pairs trade.

Howzat?

 

By betting that the gap between the two will close meaningfully sometime in the next quarter (it generally doesn’t take the market more than three months to catch on to oddities like this).

If we had our druthers (and your money), we’d buy three month CALLs on USO and sell the same number on XLE. We’d also search the tables with a magnifying glass to find offsetting prices, so the trade costs us next to nothing when we launch.

From the Shocking to the Miraculous

 

We move now to a pairing that we stumbled across after choking on our Wendy’s Triple Baconator this morning.

We couldn’t believe it. There, side by side on the Wall Street Journal’s classroom edition, were long term charts of Facebook (NASDAQ:FB) and the Market Vectors Gold Miner ETF (NYSE:GDX), screaming at us to trade, trade, trade.

But how, we asked the greasy mess before us. How to trade it? After all, we’re only human. We’re not made from three 100% fresh, never frozen North American beef, 1/4 lb. patties topped with fresh-cooked Applewood Smoked Bacon in between a premium warm, toasted bun, like you.

burp

The answer was not long in coming.

Look here –

fbgdx

This is Facebook’s full history charted against the Miners. And what does it show? That FB is the anti-gold!

What the hell has come over you, McAbby?

 

Say what you will. I’ve been through a Solemn Exorcism – you haven’t. And I ain’t going back.

Now its just money.

The trade that emerges from the chart is to be long short-term FB CALLs and to pay for them with short-term GDX CALLs.

Close the trade at the first sign of FB popping higher.

And many happy returns!

Matt McAbby, Senior Analyst, Normandy Research

See what people are saying...

  1. ivan

    Down.

  2. Jon

    Higher/money fleeing other countries

  3. Ted Helms

    DOW will be higher due to continued earnings improvement, resulting partly from much lower energy costs. Seasonal selloff will begin during mid Q2’15.

    I enjoy your blog!

  4. Andy Ermenc

    Lower……Our economy and the World economy is not chugging along as reported….it looks like the bottom will drop out sooner rather than later. Sorry about being a downer but there are fewer and fewer stocks leading this march.

  5. John Szoke

    Higher, after a quick, sharp correction in the first quarter.

  6. Donald Pollock

    Market will be lower in six months. At some point, the laws of economics have to out do the central banks messing with the markets of the world.

  7. art prevost

    I believe the stock market will fall like a rock gold and silver is going to skyrocket. Buying all the silver ,can

  8. Jim

    Higher, but with a more pronounced two way trade between now and then.

  9. Stephen Kelly

    Lower. The equity market is inflated, awaiting it’s slaughter.

  10. Jose L Pineda

    Lower-Because Deflation.

  11. Bernardine

    2p15 will be higher… then leveling out in the 3rd qtr.

  12. Bernardine

    Higher

  13. Dave

    Lower. The rest of the world will drag the U.S. down once we realize where all our stuff comes from.

  14. neil

    6 mo. lower , 12 mo higher

  15. David Shipman

    Stagnant (within the same range) — pressure from both sides with wild swings in both direction.

  16. Foolster

    Lower because the drop in the price of oil is going to trigger large losses through derivatives and hedges to someone somewhere in the financial universe.

  17. Robert Cullen

    I HOPE the Dow will be higher because I am by nature an optimistic person. That is my right brain talking. My left brain says I have very little logic or research or other fundamental reasons to predict the future of markets as I have been so often wrong-headed in the past. Will the Dow be higher or lower in six months? Nobody knows.

  18. Tim Wyllie

    Dow Down. Exogenous event snaps critical commodity price levels and the institutional traders owning tons of commodoties in storage at 100 percent equity sell with one day settlements cause a run on equities with three day settlements. That’s why oil is down 50%. It’s like the Lake Jocassi Dam breaks and every dam to Savanaaaah breaks. Short Duke Energy? GS’s 95 trillion derivative exposure causes havoc. I’m stickin with down. If up, Weimar inflation.

  19. Ian Jones

    Higher
    USA economy is on a tear while the rest of ’em are still floundering.

  20. CRWoods

    HIGHER!! Jubilance/inflation

  21. john

    stagnant
    the lower oil and commodity prices will be huge pressure on one side, and the other side such as retail and tech will have extra cash from lower fuel prices.

  22. Jannie Nel

    Higher. Global economic recovery and global surplus of cash looking for real returns.

  23. A Hanlon

    The Root of all unhappiness is the attempt to maintain the illusion at the expense of reality: LOWER.

  24. Mister Z

    Lower. At top of 5 year bull market. Speculation High. IPO’s wild. Too much bullishness.

  25. Laine

    After a 3 month pop higher, the market will tank. Lower

  26. larry

    lower the same effect that the Russians high inflation , dollar becoming worthless

  27. BBell

    Higher, tops take time to build and have some proportion to the length of the run

  28. Donald Kingsley

    Correction in the next quarter, but higher as unemployment continues to lower and consumer spending increases.

  29. thomas

    lower….will still be in correction mode through the summer.

  30. Gerry Chromoy

    Higher, economy going better & better compared to other countries, so new money into market.

  31. John

    Higher, 4th year president cycle, and year ending in 5; This is a reliable long term trend, and you don’t fight the trend! (20/20 is darn reliable)

  32. Brian

    Lower by 20%, D/T Commodities

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