yesterday i wrote to you about how the energy sector (XLE) has absolutely smoked the rest of the market this year.
surprise - nothing has changed.
as of today’s close, XLE has almost doubled the tech sectors (XLK) performance year-to-date:
none of this is new information. and yet for so many traders and investors out there, they’re still looking everywhere else other than the actual thing that continues to win all year.
some people just love to lose money. that’s OK with me. but if you’re reading this, you aren’t one of them.
so what the hell are we going to do about energy right now? can we still buy it here? isn’t the move done?
surprise! the answer may surprise you.
its not overcrowded
most people probably incorrectly assume that with XLE up 52% that the move is over.
i know it’s the first question i ask: how much more can this possibly go?
thankfully.. there are clues we can look for when deciding whether a trend is closer to the end or not.
my number one thing to look at is the flow of funds into etfs.
in case you didn’t know, there are more etfs listed in the market than actual stocks.
some may even call it an etf bubble. and they’re probably right. etfs absolutely dominate everything.
and what started as a retail investment tool has very quickly morphed into financial institutions and large money managers favorite trading vehicle.
instead of betting on individual stocks, they can easily bet on themes, narratives, ideas and groups of stocks.
so when i pulled up XLE to see just how crowded the etf fund flow was.. i was amazed to see that it’s actually slightly negative over the last few weeks.
that’s a good thing for the continuation of the trend, by the way.
side note: almost no one understands how this stuff actually works. i’ve spent the last year studying the in’s and out’s of how capital flowing into and out of etfs can give us edge when trading. and absolutely none of it makes any logical sense. good luck.
what we don’t want to see is a huge spike in etf flow at the same time as price going parabolic. those moves end up as local tops. no buenos.
the second thing i look at is positioning amongst the major players.
are they all taking the same bet on an asset class, sector, or theme? and are they at an extreme?
that’s when trends tend to unwind violently. and once again.. it’s not happening.
large speculators are actually the least long crude since before the iran war.
hell yeah. and guess what i found yesterday?
they try to hide.. but i can find them everytime
i dont just say follow the money.. i do it. and i think you should to.
as i was looking through the possibilities of putting on another energy trade to capture the next sixty days yesterday, i came across a very dedicated buyer on the options chain:
someone on the street pumped around $3.5 million into into the december 18th 67.5/75 call spreads and sold the november 20th 70 calls to finance a portion of it.
they’re making the bet that xle stays below 70 over the next 2.5 weeks and then breaking out into an all-time high into december.
and another dedicated buyer showed up today and pumped a couple million into the december 18th 70 calls while selling the november 68 calls.
if all of this doesn’t make any sense.. that’s ok. all you need to know is someone with deep pockets is betting that XLE is going to keep going up.
and unlike substack or fintwit, these guys have actual money at risk. not just claude summaries of market action after hours.
i don’t think i’m smarter than wall street
when i first got hired on at merrill at the end of the GFC, my manager told me straight out: “i didn’t hire you for your iq. i hired you for your eq.”
that really pissed me off at the time. nearly 20 years later, i realize it was an absolute gift.
the smartest guys in the room are oftentimes the biggest losers in the market. too much brains, not enough shutting the hell up and listening to what the market is actually telling you.
in this case, the market is telling me that energy has more room to run higher. etf fund flows aren’t crowded, positioning isn’t extreme, and there’s some serious money being thrown around on the chain.
so i do what i do best. i just follow along with the money, buy what they buy, and sit.. and wait. it’s worked out well for me over the last decade. i bet it would work it for you as well.
follow the money,
hamilton
founder, the trading initiative
I'd be curious to see how many hedge funds own this space too via 13fs. No one thinks of energy having a durable trend, yet here we are