What's up Trader's Edge?

Boy, what a day. I was saying this last night as oil was heading to 120 bucks in the futures, this is memification. It's no longer just the regular market.

(To watch Monday's video replay, tap this link.)

We just witnessed the memification of oil, and what it can do to markets. But oil being memified is very different than anything else. Oil exploding higher has direct negative effects on the whole US economy, on inflation, on everything. This is the first time memification went after something that could actually affect markets.

The Algo Pattern We've Seen Before

Take a look at United States Oil Fund (USO). Just an incredible day for USO. USO got as high as 125. If USO had been trading overnight, it would've been into the 130s, believe it or not. Oil went up 33%. That is not supposed to happen.

But what we're seeing when a name starts going off is this pattern. It's slowly rallying. Hedgers getting in, trading. Then some hedgers really start to step in. You start to see things go, and then the algos jump in. Then we're off to the races.

We've seen this pattern before. Take a look at gold. People are buying, people are buying, and then all of a sudden algorithms get involved. It takes off. We hit a peak and it blows out of everything in two days, then kind of finds its equilibrium.

Silver, memification. If I told you this was GameStop (GME), you would believe me. Look what happened with GameStop several years ago back in 2021. Same thing. It starts to rally. People are investing. The algos get involved, it takes off, explodes higher, comes down. We did get kind of a last gasp of air the next day, but within a week it was back to where it started.

This is all algos. So what you're looking at in USO, yes, there are hedgers and traders involved that really need to trade this stuff and are making money. But this has been taken over by algos and electronic trading, just riding that momentum. The moment that momentum starts to look like it's failing, the bottom comes out.

Why Oil Is Different

One thing that is different about the runup in gold, GameStop, and silver: GameStop, what does that really have to do with the economy? Nothing. Gold and silver represent fear around the US dollar, but the price of gold fluctuating isn't gonna be a direct drag on the economy.

Oil is different. This is where we are right now, I haven't seen this since 2007 when oil was going toward 150. What we would see is oil down, market up; oil up, market down. We saw some of that today.

Look at the reversal in the S&P 500 (SPY). We opened down about 120 points and closed up 56. Overnight futures were down as much as 132 points. On Monday, we had a range of almost 3%.

You'd expect to have this kind of movement. VIX started the day in the 30s. A VIX of 30 is telling you we're gonna move about 2% a day. But as the day progressed, once we rallied, once the oil memification started to come off, VIX came off as well. It closed the day back at 25.5.

VIX Still Flashing Warning Signs

All is not perfect in the world. That VIX term structure is still backward. It's really flattened up, but we've seen a dramatic flattening. We are still in backwardation, so we are not out of the woods. VIX is still saying danger.

But the fact that we were down and VIX was down, that we rallied and VIX continued to sell off, and USO having its dramatic one-day move, you can see markets were down, then we got this massive selloff in oil, little recovery, and the S&P was off to the races.

Is the oil trade over? No. There are different mechanics in that oil trade. It is memified, but there's actually a real event around it. Straight up war with Iran? Could we see things get right back at it? Yes. My guess is CME is gonna start raising margin rates in USO to deal with its volatility. You may see less of it, but that risk is still out there.

Last but not least, the bonds. Nice little recovery along with oil. iShares 20+ Year Treasury Bond ETF (TLT) is back above 89. It's up about the 21-day. We see bonds starting to go up, oil coming down, and VIX continuing to come down. That's your tell-all as well.

Now, what's that one stock I want you to watch? Delta Air Lines (DAL), believe it or not. Delta is a pretty good proxy for energy. On Monday we saw big call buying in Delta and United Airlines (UAL) that had a pretty precipitous selloff since oil started to rally. But we have a real shot that this thing could recover. We saw a lot of bullish call volume Friday and Monday. So watch these airlines.

I expect we're gonna see VIX lower and oil lower by the end of the week. The market, maybe not testing all-time highs, but I think the market's calming down.

-Mark Sebastian