The trading in the stock market the last few days has been all about oil. And the trading in oil has been all about speculative psychology.
Yesterday, spurred by a surprise drawdown in oil inventories reported by the Energy Information Administration, oil rocketed through $130 to $133 a barrel (“Barrel of Oil Breaks $133 as Inventories, Imports Head Lower” (subscription required), The Wall Street Journal, May 22, C1).
But there are signs that oil is topping out. I actually tried to put on a short position in oil yesterday via the DUG which is an ETF that returns twice the inverse of the Dow Jones Oil & Gas Index. I couldn’t get my limit order filled because even though oil rose higher after I put on the order so many other investors were trying to put on the same position that the DUG moved higher even as oil itself did.
Not only did the DUG move higher but volume was enormous. And the DIG which returns twice the return of the Dow Jones Oil & Gas Index moved down on enormous volume. Bespoke has some very useful charts illustrating yesterdays action in these two ETFs: “Oil Stock ETFs See Reversal On Big Volume” (Thu 5/22, 6:33am PST). On this also see: Bob Pisani “Oil, Energy Stocks Baffle Shorts” (Thu 5/22, 10:12am PST).
When you see that kind of price action with that kind of volume it suggests that many investors long oil are taking profits and many are putting on short positions. Because the move in oil is all about psychology, such a sentiment shift is pretty much all it takes to put in a top and start heading down.
Disclosure: Top Gun has no position in the DUG or DIG ETFs.