My True Wealth Systems readers are up 35% in just four months on one trade…
How are we up so much? We made a massively contrarian bet.
[ad#Google Adsense 336×280-IA]In March, we placed a short-term bet on lower oil prices. We were so confident in the trade that we made it with “leverage” to increase our potential gains.
Oil prices have crashed in recent weeks. They fell by nearly $10 per barrel in the past month. And now, True Wealth Systems readers are up 35% on our trade in a little less than four months.
Today, I’ll show you exactly how we did it… And why, despite the recent fall, oil prices could move even lower in the near term.
Let’s get started…
True Wealth Systems readers are sitting on 35% profits, as I write. But our reason for entering the trade hasn’t changed. Oil prices can move lower from here in the short run.
Here’s why…
We originally bet on lower oil prices for a handful of reasons…
First, traders were incredibly bullish on oil prices. Specifically, the Commitment of Traders (COT) Report, which measures the actions of traders in the futures markets, showed oil traders had reached their most extreme level of optimistic bets – ever.
That gave us a massive contrarian opportunity. You see, when futures traders all make the same extreme bet, the opposite tends to happen. And that’s exactly what was happening in March… Oil traders were all betting on higher oil prices.
On top of that, the economics for oil made no sense… Oil inventories were hitting multiyear highs. And oil rigs were coming back online. More oil was being pumped, despite plenty of existing supply.
The opportunity was obvious. So we shorted oil, with leverage, through the ProShares UltraShort Bloomberg Crude Oil Fund (SCO).
SCO is a simple fund, designed to return twice the opposite daily return for oil. So if oil falls 1% in a day, SCO will rise around 2%.
Oil is down 15% since our initial short, and we’re up 35% on shares of SCO. Things have worked out perfectly so far.
Now that we’re four months in, I have two important points to make:
1. The extreme from oil traders HAS gone away. However,
2. Oil prices can still fall further.
The simplest reason oil prices can keep falling is supply and demand…
Just look at the chart below. It shows the number of active oil rigs… And it has been rising for 23 straight weeks, which hasn’t happened in three decades…
Rig counts have risen dramatically over the past year… And they’re showing no signs of stopping.
More oil rigs working means that more oil is flooding the market. And increasing oil supply (all things staying equal) means that oil prices will likely keep going down.
On top of those increasing rig counts, oil inventories continue to approach record highs. In other words, we have a glut of oil… And drillers are fixated on pulling more and more out of the ground.
Today’s supply-and-demand situation doesn’t differ much from what we saw back in March when we first recommended shorting oil. But the extreme from oil traders is gone.
True Wealth Systems readers are up 35% in just four months. However, we expected to be in this trade a maximum of six months. And based on the current situation in the oil markets, we will likely keep our trade on for the full six months to maximize our gains.
Oil might run higher in the long run. But we’re up 35% in four months betting the opposite way… And we don’t think our trade is over yet.
We’ll let you know when the situation changes.
Good investing,
Steve
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Source: Daily Wealth