US Dollar and Oil Services
Started Jul 02 2009 at 9:06AM (EST) (By maven100)
Symbols: XOP, NE, NOV, USD, HAL, OIH, SLB, ERY, SCO, XTO, UUP, ESV, RIG
I have recently posted here and in more detail in my blog, the 10 reasons to be cautious going into July. As the matter of fact, after being bullish roughly since the rally started, I put the breaks on in Mid May, and have been taking beta out my portfolio. In a nutshell, I am all about risk and reward and I use a number of different indicators tehchincal, fundamental and sentiment based to estimate the potential outcome of specific trades. I have been in neutral (basically long/short mode for the past few weeks), trying to slighly ouptperform the market without high risk exposure.
Earlier this week, I have sold all of mine energy positions (except for XTO) and put on a Long Dollar and Short oil Services. You can replicate this trade by buying UUP and shorting OIH or XOP.
Why? In the begininig of the oil rally, Oil Services lead the Oil trade. For every 1 or 2% move in underlying commodity, the services group )which was extremely ooversold and cheap on every metric, would go up) 2x...and would usually move up BEFORE the oil moved. The last few weeks the group was less 'vigorous' and this week, the move up in oil totally decoupled. The geopolitacl situation (attacks in Nigeria, Iran, etc) were helping support oil prices, but the services and E&P companies were not following through.
Oil Services fundamentals have improved slighly, but most have already priced it in. From a long term perspective I totally love this space, but near term, the Head & Shoulders pattern signals technical weakness. Given that high beta nature of these stocks (largest positions in OIH are RIG, SLB, HAL, etc) I would expect the to significantly underperform the market on the downside.
Lastly, I expect US Dollar to get stronger from here - many factors in play. Mostly, I expect US dollar to move inversely to the market and commodities, so I am going long dollar to hedge my short of OIH.
Earlier this week, I have sold all of mine energy positions (except for XTO) and put on a Long Dollar and Short oil Services. You can replicate this trade by buying UUP and shorting OIH or XOP.
Why? In the begininig of the oil rally, Oil Services lead the Oil trade. For every 1 or 2% move in underlying commodity, the services group )which was extremely ooversold and cheap on every metric, would go up) 2x...and would usually move up BEFORE the oil moved. The last few weeks the group was less 'vigorous' and this week, the move up in oil totally decoupled. The geopolitacl situation (attacks in Nigeria, Iran, etc) were helping support oil prices, but the services and E&P companies were not following through.
Oil Services fundamentals have improved slighly, but most have already priced it in. From a long term perspective I totally love this space, but near term, the Head & Shoulders pattern signals technical weakness. Given that high beta nature of these stocks (largest positions in OIH are RIG, SLB, HAL, etc) I would expect the to significantly underperform the market on the downside.
Lastly, I expect US Dollar to get stronger from here - many factors in play. Mostly, I expect US dollar to move inversely to the market and commodities, so I am going long dollar to hedge my short of OIH.
This post is more than 60 days old. Replying to it might be confusing for other members reading the discussion.
By all means, keep the ball rolling and post a new opinion.
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6 Comments
Top 81%
MasterOFate
Jul 02 2009 at 9:14AM (EST)
I like your commentary but this sentence below confuses me:
"I expect US dollar to move inversely to the market and commodities, so I am going long dollar to hedge my short of OIH."
You're no exactly hedging by longing dollar against your short of OIH, because if dollar strengthens than oil price should fall which hurt OIH. You're making a similar bet.
Top 1%
beancounter
Jul 02 2009 at 9:24AM (EST)
Why not the ERY or SCO then? Is there something you like better about OIH? Is it just that it's the services group?
Top 1%
maven100
Jul 02 2009 at 9:28AM (EST)
ok, let me explain...it has to do with two things - the return of risk aversion (a flight to $) and reflation trade reversal..
Since early May, the major stock market averages have been trading in a range with few deviations to either side. A key during that time has been the reflation trade - strength in commodities and commodities stocks on a persistently weak dollar.
Naturally, the reflation trade is only plausible in this market on a weak dollar, and a weak dollar is only plausible during periods of increasing risk acceptance. This has broadly been the trade in play over the past couple of months. Now we are going the other way, in my opinion.
Top 1%
maven100
Jul 02 2009 at 9:41AM (EST)
I dont want to short oil.....again, geopolitical risks can whip the commodity like oil around. Plus when you short stock based indices...you get a benefit from overall market weakness...
UUP is not a perfect hedge here to XOP, but...directionally is should work.......
Top 1%
maven100
Jul 02 2009 at 2:32PM (EST)
Here is an article that came out today after the jobs report....pretty much summarizing my view on why dollar gains during the turbulant times...plus as I was pointing out above, the commodities lately have been moving in the opposite direction of the dollar..
Here is an excerpt...
Analysts said the market action was due to dealers buying up the dollar, seen as a "safe haven" currency during troubled economic times, and selling the euro which is seen as riskier on currency markets
Full Article:
http://news.yahoo.com/s/afp/20090702/bs_afp/forexeurope
Top 1%
maven100
Jul 08 2009 at 1:22PM (EST)
In case you followed this trade that I suggested last week, I am now getting ready to close both legs of it. Why? Although I still think USD will hold up well over the next few weeks, I am looking to deploy some cash into more interesting ideas...As far as oil services (OIH)...I think it met my price objective and I think the risk/reward is now no longer there. The group is now oversold and oil is down for 6 days in the row...I am turning neutral on the group with a slight positive bias and will play it long for a bounce trade if we the overall market holds the support (~870) or the oil turns positive and holds $60. My fav bounce plays: SLB, RIG, ESV, NOV, NE