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How to Trade Oil This Month

By Jeff Clark
Tuesday, 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




Recent Articles
Market Notes
Japanese auto giant Toyota quietly sinks to a 52-week low.
 
Oil bonanza... PetroChina, CNOOC, Petrobras, China Petro & Chemical, Schlumberger, National Oilwell Varco, Diamond Offshore, Halliburton, all at new highs... crude oil touches $85 a barrel.
 
Gold at new high above $760... Seabridge Gold, Barrick Gold, Goldcorp, gold ETFs follow.
 
China mobile continues to lead the global telecom rally... up 135% in the past year.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 37.77 +1.5% -2.8%
Gold 135.20 -0.1% +13.4%
Silver 27.93 +0.4% +47.9%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 19.39 -9.2% -8.2%
Gold Stocks 564.53 +1.3% +10.6%
10-Year Yield 3.00 +1.4% -9.6%

World ETFs
Symbol Price
Change
52-Wk
USA 122.56 +1.3% +10.2%
Canada 30.44 +1.3% +13.8%
Russia 21.63 +2.3% +16.7%
India 37.73 +1.9% +20.0%
Israel 16.47 +0.9% +9.7%
Japan 10.58 +1.0% +7.4%
Singapore 13.88 +1.0% +19.2%
Taiwan 14.72 +1.6% +17.8%
S. Korea 56.56 +1.7% +22.8%
S. Africa 70.85 +3.9% +22.9%
China 45.06 +1.4% +0.1%
Lat.America 52.82 +1.4% +6.7%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 136.18 +1.5% +14.8%
Big Pharma 64.13 +0.6% -3.3%
Internet 72.13 +0.7% +22.3%
Semis 16.03 +2.1% +28.9%
Utilities 31.21 +0.3% +1.6%
Defense 18.51 +1.3% +10.1%
Nanotech 9.99 +1.3% +0.0%
Alt. Energy 9.95 +1.4% -4.4%
Water 18.31 +1.1% +12.2%
Insurance 16.07 +1.2% +18.3%
Biotech 20.58 +1.1% +27.1%
Retail 19.65 +0.1% +28.4%
Software 24.59 +0.9% +24.1%
Big Tech 53.73 +1.0% +21.9%
Construction 12.99 +2.1% +13.3%
Media 13.57 +1.1% +25.0%
Consumer Svcs 67.26 +0.8% +23.3%
Financials 54.87 +2.4% +5.2%
Health Care 64.22 +0.7% +1.3%
Industrials 63.25 +1.6% +19.7%
Basic Mat 73.57 +1.6% +21.6%
Real Estate 55.24 +1.4% +23.8%
Transportation 91.17 +1.4% +25.6%
Telecom 22.48 +1.1% +17.1%