My thoughts on DUG

Is it time to get back into DUG? If you read the dig and dug boards many think so. They are pointing to a triple top on the major oils and claiming that the economy does not support the high oil prices. I have been in and out of DUG recently. Here are my thoughts:
The primary driver of oil prices has and continues to be dollar weakness. Until we see the fed start to ease the prices will stay high. We are also entering into the summer driving season and demand is moving upwards short-term.

In the mid term I think DUG is a good bet. The prices of the majors do not factor in almost any downside. Speculation has been a large drive of oil prices and interest rates can only fall so far. However, in the short-term I think caution is merited here:
1. The trend is strongly up on oil companies. A trend is innocent until proven guilty
2. The European bank has tilted heavily towards continuing to keep interest rates high. This keeps the dollar relatively weaker amidst the backdrop of fed interest rate cuts
3. Oil prices usually go up this time of year, as do oil stocks. We are on the precipice of driving season.
4. Earnings may be enormous with oil prices so high. Or not. Remember that refiners are hurt by the high input costs.

There may be a short-term correction even after the oil inventory report is digested but I think that it will take a catalyst to change the overall trend. The most likely catalyst...
1. Any weakness in oil company earnings. COP reports tomorrow.
2. Any sign that the fed is going to stop lowering interest rates and that the dollar will reverse.

My personal thoughts...
It makes sense to buy some DUG with the idea of it being a solid investment over the next months to year. The risk reward looks good here. However, if the oil stocks are able to break through their highs (about 95 for XOM and CVX) with volume which could happen with blow-out earnings or fed comments about continuing need to lower rates then this is a poor short-term investment.

Bottom line:
I plan to buy a little DUG but only plow in if either a clear trend reversal is seen with volume due to factors mentioned above or if the oil has a crazy jump upwards from here that has nowhere to go but down...
BUY some at a good price now and closely monitor conditions. DUG merits being on high watch alert but needs more for heavy investment in my opinion right now. In the very short-term I will wait to see what the effect is of the inventory reports. Also COP will be telling.


This blog is for informational purposes only. It does not give investment advice.