Matt Trivisonno’s Blog

After oil plunged over the weekend, stocks opened up on a large gap this morning, but the surge was immediately sold. Many commentators were baffled by this development, however today provided a rare, concrete example of a discovery that Marty Chenard of StockTiming.com made a few weeks ago.

Chenard is an expert on the buying-and-selling patterns of large institutions, and he has found that when oil falls, triggering a rally in stocks, the big funds sell into that rally. It was a surprising, seemingly counter-intuitive discovery.

But it makes perfect sense.

We are in a bear market and large funds have lots of stocks to unload. They can’t just dump huge holdings any old day because they will push prices down and bring in less cash. So, they have to wait for a high-volume rally to do some selling when there are a maximum number of eager buyers.

And that is what happened this morning.

Ospraie, a commodity hedge fund, appears to have used this morning’s oil-inspired gap-up opening in stocks to dump a large amount of its holdings.

I say this is a “rare” example because the majority of funds dumping stock are not blowing up completely, so we don’t have a good way of identifying exactly who is dumping what because their selling doesn’t make headlines. But that selling is indeed tracked by Chenard every day, even if he only knows “how much” without the “who”.

If you compare USO and SPY from when oil started falling in early July, you will see that stocks simply have not rallied as much as you would expect. Now you know why. The big funds are unloading, though they are trying to pick good spots to do so.

Today, Jim Cramer said that the pop this morning was the “real” market, and the “flop” in the afternoon was just some hedge fund blowing up. That is both true and false. Yes, the dumb money buys when oil falls, but then the big money sells. The net effect is that the market can’t make much progress.

And this dynamic shows no signs of ending yet. In fact, Ospraie itself says that it is not done selling, and just might be clubbing a few more falling-oil rallies in the future.

Take a look at the list of Ospraie holdings with this link provided by Topper Harley. We don’t know which ones Ospraie is done selling. Some may be good shorts, and some may be playable for an oversold bounce, though Ospraie may be waiting for just such a bounce to do some more selling.

Cramer also lauded the financial sector today, saying that the sector’s strength was proof that the economy was on the road to recovery. However, it was the financial sector itself that clobbered the market. Lehman Brothers (LEH) owns a 20% stake in Ospraie.

So, a second moral of the story is that the financial sector is not done blowing up, and that it can take down completely unrelated sectors as its hedge fund components spray their shrapnel.

Note: the market peaked at 10:00am when two disappointing economic reports were released, so Ospraie doesn’t get all the credit for today’s dramatic developments.

This entry was posted on Tuesday, September 2nd, 2008 at 11:23 pm and is filed under Investing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.