Oil ETF Rally Not Too Believable

As one of this year's worst-performing commodities, oil already has plenty of doubters and those concerns were not allayed by USO's tumble last week. USO was actually trading higher for most of last week until the fund slid 2.2 percent last Friday even after a surprisingly strong June jobs report.

Options market data suggest that some investors are bullish on USO and could be using puts to hedge long positions in the ETF. The reason being is that USO, despite its struggles, has accumulated new assets this year. Or perhaps are just getting bearish on the fund, which makes sense. 

Bearish Options Data

“Lately we have seen August 8.50 put activity in the largest Crude Oil tracker USO,” said Street One Financial Vice President Paul Weisbruch in a note out Friday. “Just eleven trading sessions ago however the fund traded at a new 52-week low at the $8.65 level, so it is apparent that hedgers are entering the picture here given the recent dead cat bounce in Crude Oil.”

For most of this year, investors have been embracing USO even as the ETF and oil have slumped. Year to date, USO is down 22.3 percent and languishes 14.7 percent below its 200-day moving average, both bearish signs.

“Year-to-date, USO has seen decent inflows to the tune of about $465 million in (with a total of over $3 billion in AUM currently), and it continues to hold the number one spot in the “Crude Oil” category in terms of its asset supremacy, which has been the case for years on end here since the fund’s inception in 2006, even taking into account well-documented issues that the fund has with contango,” said Weisbruch.

Bearish Ideas

Predictably, inverse oil ETFs are thriving this year. For example, the ProShares UltraShort Bloomberg Crude Oil SCO, a double-leveraged bearish play on the commodity, is higher by 47.4 percent year to date.

Unfortunately, traders have been getting it wrong with SCO and related fare, departing or outright ignoring these funds even as oil continually slides.

“The first inverse ETP shows up at number six in this space in terms of asset size, the $127 million SCO, which has seen notable net outflows (-$145 million out) year-to-date,” added Weisbruch. “However, in the midst of the recent downside put buying in USO, given what some may see as a 'dead cat bounce' type rally, it pays to make note of not only SCO but other Bear and Levered Bear ETPs in the space as they may very well see an uptick in interest in the near term.”

A Surging Industrial ETF