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I hope everyone had a relaxing weekend. I found more shorts than longs this weekend and that seems to be a recurring trend with me lately. The market ended the week on a very weak note. On Friday Up/Down volume was about 5 to 1 on the NYSE, and the NAZZ was about 3 to 1 negative. The indices broke down last week with with the NDX holding secondary support around 1950 but the SPX broke below a key level at 1383. Cause for extreme panic? No way, but be aware. I am short XOM and UYG going into the open. The financials look like they could bounce even though I think the group goes lower. I would like some weakness in the group early tomorrow so I can maybe get ready for a long side bounce. There was a decent read in Barrons this weekend where Sy Jacobs of JAM Partners was interviewed. He has been very right for a while on the collapse in the financials and is calling for much more pain ahead. This time it's commercial lending. I don't like the group, but all things are a trade at some point. Take a look at the chart of LEH. It looks like a good short around $35. It should be interesting and I think we may muster a rally but I am ready to go either way. Oil as usual will set the tone

Why Charts Are My Friends

The chart to the left I posted this past Sunday. From top to bottom the $DJI went on to lose over 600 points last week and the VIX closed over 20

DUG

I have made a few posts lately about the odd behavior in DUG. I pointed out that it wasn't really a play on oil as a pure play as XOM and some other names play a part in the dynamic. Trader Mike did a great post on the real deal. I had a problem with the link so here is the whole enchilada.

Know What’s in Your ETF and How the ETF is Calculated

By Michael on May 24, 2008 in Stock Market

One of the Fast Money guys mentioned the UltraShort Oil & Gas ProShares ETF (DUG) on yesterday’s show. He questioned how that ETF, which is the double inverse of oil & gas could be up for the day while oil was also up. A quick look at what DUG actually is gives the answer:

UltraShort Oil & Gas ProShares seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the Dow Jones U.S. Oil & Gas Index^SM

That “daily” part adds one complication to the picture. From the article ‘Understanding ProShares’ Long-Term Performance’ on ProShares’ site:

ProShares are designed to provide either 200%, -200% or -100% of index performance on a daily basis (before fees and expenses).

A common misconception is that ProShares should also provide 200%, -200% or -100% of index performance over longer periods, such as a week, month or year. However, ProShares’ returns may be greater than—or less than—what you’d expect over longer periods.

The article goes on to explain how & why this happens. But the question about how DUG could be up while the price of oil was also up is answered by looking at what comprises DUG — the Dow Jones U.S. Oil & Gas Index^SM. That index “measures the performance of the energy sector of the U.S. equity market. Component companies include oil drilling equipment and services, coal, oil companies-major, oil companies-secondary, pipelines, liquid, solid or gaseous fossil fuel producers and service companies.” Note that the actual price of oil is not mentioned. When you look at how that index is constructed you’ll see that ExxonMobil Corp. (XOM) makes up 28%, Chevron Corp. is 11% and ConocoPhillips is 7%. So at least 46% of the index is big oil companies (major integrated oil & gas). Then the question is how does the price of oil relate to movements in those oil companies? Below I’ve plotted oil vs. the index and Exxon Mobil over the last 12 months. (For ease of charting I’m going to use the United States Oil Fund ETF (USO) as a proxy for oil. USO may have its own issues but it tracks the actual price of oil close enough to make my point.)

This shows that the price of oil has seriously outperformed the index and Exxon Mobil. Here are the actual percentage changes for each:

• USO (oil) was up 113.2%
• the Dow Jones U.S. Oil & Gas Index^SM was up 24.5%
• Exxon Mobil was up 9.3%
• DUG was down 44.1%

Well at least USO and the Oil & Gas Index went in the same direction over the last 12 months. But on any given day, like today, they could trade opposite each other. And that means that DUG, on any given day, could trade with oil instead of opposite oil. I think many people would assume that if oil was down 5% DUG would be up 10%. That’s clearly not a good assumption to make I’m seeing a lot of people talking about buying DUG to profit from a drop in oil prices. Given the performance data above I think they’d be better off shorting USO. (That is, if they can find shares of it to borrow — I’ve had problems with that in the past.) Puts on USO may do the trick too.

Hopefully those who are trading DUG know that they’re not playing the price of oil directly and won’t be surprised on days like today when DUG and oil trade in the same direction. You’ve always got to know what comprises any ETF. I know that Google directs a lot of people to my list of inverse ETFs who are specifically searching for a way to short oil. Hopefully they do more research than just look at the name of the ETF and really find out what they’re getting.

Shopping LIst and Have A Great Weekend

I don't know about you, but I'm looking forward to the weekend. I'm ready to fire up the barby,eat some red meat and drink some good wine. It was an emotionally taxing week with oil behaving the way it did and stocks just acting way to funky. I was short XOM all day and took it home as it closed right near the low of the day, and I was short UYG all day which I also took home.I don't trust what oil will do, but the XOM chart is speaking volumes. My RTH short is working well and I am still short. I caught CSUN for a nice trade thanks to my trader buddy Bert, and I just want to hang myself for not jumping on QCOM at the open. It was on the top of my list this morning as the chart looked so sweet, but I got caught on a phone call and just flat out missed it. It gave me several opportunities on pullbacks to get involved but I was too pissed to throw money at it. Just stupid, those perfect setups don't come around everyday. The solars had a later day rally and looked pretty good but I didn't trust anything today as the technicals were lousy and the volume was crap. It reminded it me off Christmas or Thanksgiving eve, where really anything can happen.

This weekend I will be working on a shopping list for next week. Many good stocks are at or near great buy ranges. I will also be analyzing my trading and how I can improve. I'm such a work in progress and it is truly amazing that I literally learn something new everyday. I listen to a live feed to the S&P pits in Chicago every day and a trader there was talking about how "you never let your trade turn into a prayer." Words to live by, you will be able to stay in this wonderful crazy business forever through risk management and realistic position sizing. Simple techniques, the hard part is living by it every minute. I will thinking out loud over the weekend. Please enjoy the weekend and the folks that you love. It ain't all about the dollars.

PS I sold all solar names I had in the CNBC challenge

Like I Said.....................

Just NOOOOO reason to be long

IVGN

I am a little long here. Target $100

Three Day Weekend

Oil is up and futures are slightly lower. Fridays are usually bullish for oil but we are in strange times so we will just have to see how it plays today. Looking at a potential DUG long and an XOM short soon. I mentioned a few posts ago that I was getting ready for a short of retail.I am now short RTH(retail holders) around $96. I will stay short for a while on this one. I still believe the consumer is fried.

The solars were toast yesterday and STP couldn't run on a good number. SOLF down $5 on a Goldman downgrade. They probably need to back and fill,but if oil rolls over they do have huge room on the downside.