Interesting Observations On The Oil Market And Why It Matters
The recent volatility in the broader market is leading to some very interesting observations on the energy market as a whole. In an article we published last week titled, "Crowded Trades, All Correlations Go To One." I said:
I think what we are seeing in the market today is a liquidity event resulting from hedge funds piling out of crowded trades. The short Yen trade has been extremely popular, and as the currency strengthened, the trades that came along with it are being sold. This resulted in a massive de-risking event.
But if I am right, once the dust settles, we should see the trades that were crowded continue to underperform, while the uncorrelated trades like energy rebound.
This should become more evident over the next 2-weeks.
I followed that article with the WCTW published on Monday alerting all readers that we bought UCO and BOIL to express our bullishness in crude and natural gas.
Fast forwarding to today, crude and natural gas have materially outperformed the broader market since last week's meltdown. Interestingly enough, energy stocks have also slightly outperformed their tech counterparts.
While I believe it will take a bit more time to confirm my thesis that the broad market sell-off last week resulted from the crowded trades unwinding, there are some interesting observations I think I should note to subscribers given the past few days.