Stock Talk #3: The Oil Surge

Another week of quarantine in the books, another week of overdramatized ups and downs for the market. After the much discussed mini bull rally I wrote about in Stock Talk #2 , stocks over the last two days were overall down. However, energy (represented by XLE, the energy ETF) – specifically oil (represented by USO, the oil ETF) – surged on rumors of a potential oil deal between the Saudis, Russians and US that would cut back production:

The oil surge shows up on an individual name basis – check out the top 10 stocks from yesterday above 80th percentile market cap for publicly traded stocks:

Energy stocks I screened for at smaller market caps had even more extreme moves, like PDCE ($783.5 million market cap), which was up 25% yesterday and as I write this is up 7% pre-market:

The long-term story for energy remains terrible, and this chart is a good microcosm of that story – PDCE was a $47 stock at one point, and has fallen ~83% off its highs. XLE remains down over 50% YTD.

I want to watch oil stocks now and make them the subject of future letters. Short oil is a trade that has worked extremely well for the last several years, and it seems logical to assume that many traders used this upsurge as an entry point for new shorts.

One more thing I wanted to touch on that I found interesting this week – the decline of traders’ measure of forward volatility, as measured by the VIX:

One way to interpret this decline is that the market expects future weeks to be far less volatile than what we’ve seen since the beginning of the C19 crisis. Similar to the short-term oil long trade, the short-term short vol trade has been a loser since the start of March and may represent a good entry point if you want to be long vol.

I’m not sure if the mini bull rally this week, the rise in oil stocks or volatility dying are paradigm shifts or short-term trends. I plan to follow all of these in next weeks’ editions of Stock Talk.

Cheers to another week,