Be Careful Not To Slip On Oil…

Be Careful Not To Slip On Oil…
Stéphane Renevier, CFA

almost 2 years ago1 min

The SG CTA Index (represented by the white line above) tracks hedge funds that favor a strategy of mechanically buying assets that are going up and shorting those that are going down. And given how correlated this index and the price of oil (orange line) is right now, the implication is clear: those funds are heavily invested in the black gold.

That matters because funds don’t buy for fundamental reasons: they essentially just ride significant price trends. And at the first sign of weakness, they’ll mercilessly turn from buyers to sellers, shifting the supply-demand dynamics and exacerbating the reversal in prices. So the importance of these funds to the oil market right now makes buying the commodity a risky proposition, as prices could suffer from the cold-blooded volte-face of their former ally.

So if you’re bullish on oil, a tight trailing stop-loss might make sense in this environment: you’ll keep the upside as long as the trend remains positive, but limit your losses in the event of a rapid reversal. And if you’re still bullish after that, the washout in positioning should provide a pretty attractive opportunity to re-enter the trade.

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