A Watched Pot Never Boils (USO)

A Watched Pot Never Boils (USO)

Not just another useless piece of proverbial folk wisdom, friends; this one has some real cachet – and for market watchers, too.


In fact, consider it an iron-clad rule of investing for all traders at all times that when everyone is looking in one direction, right behind their backs something big is about to happen.


And not only that…


The very thing they’re so intent on gazing at… won’t do anything at all.

Girls scared

That’s just the way it goes, Lilja.


And so it is today, when every broker’s trading screen has been configured to feature oil and China prominently. We can’t, in fact, remember a time in the last decade, when every man Jack was so fixated on just two aspects of the global economy. But that’s where we’re at. Not even time to peek at an old episode of the Flintstones.


It’s that bad.


And again, it’s for precisely that reason that both oil and China will muddle about at their current levels and move not a whit for the next month at least. Until all the blowhards and strategists and other assorted rapscallion weasel know-it-alls have exhausted us with their wisdom and insight and charm on the matter of China and oil – only then will you see a genuine trend start to develop.

Horizontal Secretary

Ooh – hoo, Aurora, if you only knew…


But that’s for another time.


We’ve already mentioned (last week) that the gold miners (GDX) have punched below six month support, registering a new bear market low, and, as such, we should shortly be privy to a center shot of the metals getting the boots put to ‘em.


Beyond that, there are several other developments that we find worthy of mention, though we’re not certain what their long term prospects are at present. Amid all the yelling and index zigzagging over the last month or so, it could be that what we present to you now is nothing more than an odorless, gaseous emission. And with the troubles we’ve been having of late with the valve, well nigh anything is possible.


That said, look here –

TLT Technical

This is a chart of the U.S. long bond, represented by the iShares 20+ Year Treasury Bond ETF (NYSE:TLT).


The chart is showing a great deal of strength, in spite of the Fed’s latest rate hike and her stated intention to continue raising. And while it could be just the last, dying gasps of a comatose investment class, whose latest wrenchings and twists are no more than a knee-jerk response to the current panic in equities, we’re still watching closely.


It wouldn’t surprise us, in fact, to see a scenario that included continued gains for TLT over the next few months at least, despite our earlier negative projections for the Treasury market, and particularly in light of 1) the current volatility in equities and 2) diminishing growth prospects we’re seeing worldwide.


Blindside Moves, Part II


While the latest strength in the long bond certainly caught us unawares, the dive in oil has not. It’s been front-page center too long to miss.


Where we didn’t look for trade opportunities, however, was in collateral markets, where oil exports comprise a great chunk of a given country’s domestic stock market.


A quick search revealed to us that despite the drastic decline in the price of crude, one such country’s stock market was continually resisting the trend.


See here –

RSX Technical

Whereas a drop in the price of crude only two or three years ago brought about a disproportionately even greater drop in Russian equities, today that relationship appears to have reversed.


From the chart above, we see that USO, a proxy for NYMEX Crude, has dumped 45% in just over three months, while the Russian index (RSX) is off a mere 20%. That’s new. And we just noticed.


Once again, there could be a number of varied explanations for a decoupling like this, and it’s clearly too early to speculate. In the meantime, we’re going to continue to monitor the situation with an eye toward a long Russia pairs trade in the weeks and months ahead.


Single Stock Heaven


One more stock to pitch at you.


Shares of Keurig Green Mountain Inc. (NASDAQ:GMCR) have consistently defied the odds over the years – in both directions. From highs of $115 in 2011, the stock plunged to an embarrassing $17 less than a year later. Then, like a phoenix, GMCR climbed to almost $160 in November of 2014, while one more year on, (see chart below) yet another round trip was underway.


The company’s shares slid from $160 to $40 this last November, then rocketed back to $90 in a mere fifteen trading sessions.


Absolutely remarkable.


We’ve played this one for some big gains in the past, but at the moment it’s unclear which direction she’s headed next. The move will be big when the trend starts to form, that’s for sure. We’ll keep you posted when we get it all figured out.


This Week’s Trade


We’re going to return now to our ‘watched pot’ analogy from above and offer you the following.


First, it’s clear to us that oil and China ain’t going nowhere in the next short while. While literally everyone is now taking direction from those two items, nothing – absolutely nothing, as we outlined above – is going to happen to either.


With that in mind, we look to which of the two offers the richer options premiums, as it’s sellers of their options that we desire to be over the short term.




Implied volatility on both the United States Oil Fund (NYSE:USO) and the iShares China Large Cap ETF (NYSE:FXI) have been elevated for some time, meaning premiums have been inflated. But those of USO have surged recently, and that, in our opinion, makes the time ripe for a short straddle.

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Wall Street Elite recommends you consider selling the USO February 26th 9 CALL and 9 PUT, for $0.73 and $0.59 respectively. Total credit on the trade is $1.32.

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USO currently trades at $9.03 a share.


With kind regards,


Hugh L. O’Haynew

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