Wednesday, December 24, 2008

Went long DIG today

DIG is an ETF that is a "double bull" tracker of the Dow Jones U.S. Gas and Oil index ($DJUSEN), so when this index of gas and oil stocks goes up 10%, this ETF is supposed to go up 20%, although its tracking feature is far from perfect as with all these types of ETFs. This is a short-term trade that I am using in the hopes of making a quick 10% or so.

My rationale for this trade is based on technical-type analysis using charts such as the USO ETF chart as a proxy for oil price compared to the chart of DIG as a proxy for oil and gas stocks:

This outperformance of stocks relative to the commodity they are associated with is common with many commodity stocks and can signal a pending turn in the sector and/or the underlying commodity. Stocks typically lead the price of the commodity they are associated with on the upside and downside, thus stocks can signal both the start and end of a bull or bear move by diverging from the underlying commodity price they are associated with. Like everything in investing, there is no perfect indicator, but this one is pretty good as far as indicators go. This outperformance of oil and gas stocks relative to the oil price can also be displayed using a ratio chart of DIG divided by USO:

Lastly, a ratio chart of a general commodities index ($CCI) to oil ($WTIC) showing how the darling of all commodity investments, Mr. Oil, has rapidly been forced to eat humble pie relative to other commodities:

Bottom line: this is a short-term trade playing for an overdue bounce in the oil and gas stock sector. I am looking to make 10% quickly and will sell as soon as that can be achieved. I bought DIG just under $25 and already put my sell order in at $27.50. I think this sector will make a much greater than 10% trade over the next 3-4 months, but I want to focus my money on gold stocks this spring. I want to make some more money but not get tied up in any longer-term trades that will interfere with my planned re-purchase of gold stocks in the January to February time frame. I am already out of my recent SRS ETF trade with quick profits, but I am looking to re-enter this ETF as well if it comes back down into the low 50s.

Wikinvest Wire