More Overreaction in Energy Stocks

The higher volatility in these stocks makes no sense, but it comes with the territory.  Here’s the story, and I’ll explain more below.

Link: Energy ETFs Leak Oil.

Bloomberg reports that Crude oil fell on expectations that milder temperatures in the U.S. will help preserve stockpiles of winter heating fuels that are above average levels. Warmer weather is forecast for most of the U.S., with temperatures in…

I spoke today with a company that provides software to the hedge fund industry.  I asked how many of his customers needed software to trade futures as well as equities (and equity options).  He said that it was very few.

This was another piece of evidence (not the first i have seen) that many hedge fund managers do not have direct access to the commodity trades.  There is a lot of regulation and paperwork in opening a futures account, and many do not do it.  The result is that when they form an opinion about the price of crude oil or natural gas, they trade the XLE or something.

Equipment companies that should be priced off of 2007 earnings and beyond are whipping around because we had a few days of warm weather.  When they go down a little, then the momentum trade takes them lower.

It is a good opportunity if you want to establish a position and pick your spots carefully.