Sold all DUG on Thurs; Market Correction Coming?

This post has two parts:
1. DUG discussion
2. Some thoughts on a market correction

I. DUG
I sold all my DUG on Thurs at 29.67. I didn't get a chance to post this. .. as I mentioned on multiple posts I am very busy right now during the week and actually I had to make the time to discuss SDTH as much as I was able to. I didn't want to post the DUG sale without an explanation of what I was thinking and why. Given what happened on Friday perhaps I should just have briefly posted my action... but of course I had no idea it would drop so much on that one day...

So here is my explanation. The reason I have liked DUG is because it has been my sense that the fundamentals do not support the meteoric recent increase in oil price. Speculation has been driving it and in a slowing economy with demand here in the US already starting to slow. There is a lot of leverage driving this too so when it falls it will likely fall hard. Additionally there appeared to be resistance at 115 on DIG (until recently) and this seemed like a good play with a tight stop on DUG. Put another way the supply/demand concerns are the underlying reason for the incline in oil price which is then being taken to the extreme by speculators. The fundamentals don't support the incline and when the oil price falls it will fall hard and DUG will reap a large windfall.

This argument still has truth but my overall perspective has changed. You can't play this based purely on fundamentals because they simply may not matter. The prices appear to be determined by the hedge funds and institutions. Does real oil demand/supply mean anything... or is the perceived demand from BRIC countries enough to provide a satisfactory excuse for driving up oil prices? The following article argues that the big investment houses have a harder time making money on the weakening US companies and are instead turning to UNREGULATED oil speculation on the London ICE to drive prices through the roof.(*updated... I've been working on this article since originally posting it so I could view it...so if you read this earlier the part below is new info)...
Does this manipulation mean I am forever out of DUG? No. It does mean that the big houses are determining the price of oil and hence DUG and if you look at the chart on DIG (or OIL or others) you will see that there has been a recent meteoric bull rally in oil and that the pullbacks (which I have profited on on occasion... and have saved myself by taking profits) remain just that and not the start of a new trend. Both major pullbacks in DIG/upswing in DUG occurred after the last two FOMC meetings which suggested that rate cuts may be coming to an end. In the face of such manipulation it is prudent to play DUG for what it is: an opportunity for a short term trade on correction in DUG decline with tight stops . This is true if/until the major trendline in DIG/DUG reverses. As of right now this will be determined by if/when GS and the like decide to pull back or talk of regulation in the futures markets comes to the fore. IMO until something changes buying and holding DUG, as opposed to finding oversold conditions and jumping in for a quick corrective rally, is a pure losing strategy right now. If the worm turns we may get the opposite: a bull market it DUG...and I wouldn't be surprised if it does happen as GS and the like force oil down and make money on the other side... but until the trend line changes this does not make sense. Another way to play this can be to buy DIG and DUG as hedges and sell/buy on extremes to take advantage of volatility.

II. Market correction coming?
It's long overdue. The fundamentals are still terrible in the US economy. Also I think that the perception of sell in May and go Away... even if it is just a medium correction rather than a retest of the 11,700 Dow lows, (not likely as long as the fed and politics wants a stable market) will be enough in a Bear market such as this to trigger sales. This is just a hunch on my part. However, I would be careful long here just and personally may consider some short instruments here. I will be looking for any selling especially in the weak sectors as we move towards Memorial Day. Until the market tips its hand this is unconfirmed and in my opinion is just something to watch.

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