Free Investing

Matthew Bradbard submits: Based on the last two days' action Crude oil appears to be making attempts at higher ground. We will be late to this move because I do not trust it and need further confirmation before getting bullish exposure for clients. A settlement above $79.50 would be the first hurdle. Natural gas will close 8% higher this week at a fresh one month high. We’re suggesting trailing stops on futures just below the 50 day MA and to purchase October and November 50 cent call spreads.The Dow bounced off the 200 day MA at 10275 and could revisit the week’s highs early next week closer to 10550. We would still suggest selling rallies, thinking a weak jobs number next week could be the nail in the coffin for the bulls. Likewise the S&P pared losses today, but as long as prices settle below 1104, the 200 day MA, we think it remains a sell rallies market. For now clients will be fading rallies and purchasing September puts in the ES.Complete Story »

Matthew Bradbard submits: Crude recovered the two previous days' losses, gaining 1.8% today. We expected to see the 50 day MA give way and prices to trade lower, we were wrong. We would move to the sidelines until Crude gives a clearer signal on direction. We expect a trade above $79.50 to signal higher ground, and a trade below the 50 day MA at $76.35 to signal lower ground. Natural gas is higher by 2.44% as of this post, having gained all four sessions this week. For futures traders, as long as the 50 day MA holds, on a closing basis we would remain long. For option traders, we like purchasing 50 cent October and November call spreads. We would think after a 50% Fibonacci retracement and a failure to remain above the 200 day MA indices are headed south again. Whether it be talk of deflation, a disappointing jobs number or lackluster earnings, a move below the 50 day into next week, at 1077 in the S&P confirms lower action. Aggressive traders could short indices with stops above the recent highs. Complete Story »

Brian Kelly submits:With little fanfare, Harry Reid tabled the Cap and Trade bill in favor of a watered down version that has been dubbed “The Spill Bill”. While most of the attention will be focused on punishing BP (BP), there is one part of the bill that could prove to be an investable catalyst. The bill provides incentives to convert the nation’s 18-wheel trucks from diesel fuel to natural gas. This provision has been heralded by T. Boone Pickens, but the current version falls short of his preferred design. Nonetheless, it should provide an excuse for the “risk-on” crowd to look toward natural gas as the next transportation fuel.Complete Story »

ETF Database submits: U.S. equity markets rose for the second straight day as the Dow and Nasdaq posted 1% gains and the S&P 500 ended higher by 0.8% to finish the week above the 1,100 mark. Two solid days in a row reignited traders’ demand for risky securities which sent gold down more than $7/oz. and pushed up the benchmark 10 Year T-Bond yield to just under 3.00%. Friday’s boost came after positive news from two American bellwethers; GE hiked its quarterly dividend by 20% which helped to alleviate fears over its capital division while Verizon (VZ) upped its sentiment for the rest of 2010 after beating the Street’s earnings estimates but slipping on revenues. These reports helped to push up both of the Dow components by more than 3.5% on the day. “Expectations for a double-dip have passed somewhat. When you start looking at the robust earnings, (it’s clear) we’re going to have continued growth,” said Steve Goldman, market strategist at Weeden & Co in Greenwich, Connecticut. In addition to U.S. earnings season, European bank stress tests weighed on the markets; only 9 of the 91 banks failed the test, leaving many to wonder if the program was too easy for most banks and if a more rigorous test would be needed to truly test the health of the European banking system. “The stress tests do not seem that stressful and it is looking more like a political whitewash rather than a genuine attempt to reassure financial markets that euro zone banks have balance sheets that could really withstand sovereign risk shocks,” said Neil MacKinnon, global macro strategist at VTB Capital. One of the biggest winners on the day was the iShares Russell 2000 Growth Fund (IWO) which jumped higher by 2.7%. This jump came as investors returned to equities and bought up the most volatile market segment, small cap growth equities, on continued solid earnings reports in a variety of sectors. Of particular concern to IWO shareholders are the results of health care companies since this sector makes up 21.1% of the fund’s total holdings, by far the largest single weighting. Eli Lilly (LLY) beat estimates by 12 cents a share, helping to set the tone for some of the smaller names in the sector such as the $1.2 billion market cap Immucor (BLUD), which surged higher by 6.6% in Friday’s trading, giving a nice boost to the rest of the small cap health care sector. With continued weakness in many of the top health care names and growing drug portfolios in many small caps, some investors are growing increasingly hopeful that a wave of acquisitions is right around the corner as Big Pharma looks to beef up weak product pipelines by bidding for smaller companies. This could help to boost small cap growth funds going forward [see more holdings of IWO here].Complete Story »

Roger Nusbaum submits: Businessweek posted a lengthy article called Amber Waves of Pain which is about the extent to which investors are not getting what they expected from commodity based ETFs. Obviously the US Oil Fund (USO) and US Natural Gas (UNG) have gotten the most attention for "not working" but there are more funds that have been impaired by roll issues meaning that the funds have to replace expiring contracts with further contracts that are more expensive--this is known as contango.The article has all sort of examples of the underlying going up X% while the tracking fund goes down X%. There are many stories like this which is the entire point of the article as a sort of buyer beware.Complete Story »

James Cordier submits:For anyone who hasn’t noticed yet, it’s July. Soon to be August. To Natural Gas traders, that means one thing: Hurricane Season. Here in Florida, the local media is already getting geared up for the annual gala. The theme is simple: We’re all going to die. To the national financial media, the seasonal theme takes a slightly different direction, albeit much the same in it’s grand spectacle: Hurricanes will wreak havoc on gulf oil and natural gas rigs. Who knows how high prices could go? As the US gets as much as 25% of its domestic production of Natural Gas from Gulf rigs, its price can be even more sensitive to storms than that of crude oil. It seems pretty simple then. You buy Natural Gas in July, wait for the hurricane, collect your riches.But alas, like everything in life, that which seems simple is so much more complex. Expecting the spectacular is seldom a wise investment decision. Had you followed this strategy for the past decade, chances are that you would not have fared well. For the cold fact is, real gulf storms that do enough damage to rigs to significantly disrupt production are extremely rare. Hurricane Katrina and to a lesser extent, Rita, were exceptions to the norm. Granted, they can happen and their possibility should not be discounted. However, banking on them to happen is most likely similar to playing the roulette wheel in Vegas. As an option seller, I’m guessing that’s not what you are about. The media hype surrounding hurricane season brings out the public to trade natural gas. And as we know, what is the public’s favorite tool for trading “volatile” markets? Buying options, of course. Fundamentals tell a Different StoryNatural gas prices have continued to flounder for most of the year due to hefty supply. New discoveries in Texas and Pennsylvania have opened the door to long term future supplies, changing the big picture supply dynamic for natural gas. At 2.891 billion cubic feet in storage, natural gas supplies remain near historic highs for this time of year.Natural gas supplies remain near record highs for this time of year (see chart) which will be the prevailing headwind the bulls will have to overcome to stage a late summer rally. Total storage levels remain nearly 10% above the 5 year average for this time of year. But the bulls do have a few bullets to use. This week’s EIA report showed a 10% jump in natural gas used for electric power. Overall US Natural Gas demand was up 4% on the week. Both of these figures were most likely the result of the heat wave that swept much of the nation this month. In addition, funds seem to be rediscovering commodities this month as the “risk trade” returns to the market on easing European fears and an overall “quiet” news time in the US. Then of course, there is Tropical Storm Bonnie, the all too important first storm of the season to potentially “threaten” gulf natural gas rigs. Right now it is a disorganized rain storm expected to weaken over Florida. Granted, it could gain some strength over warmer Gulf waters but is not expected to grow into a major storm. Natural gas rigs are built to withstand the ravages of the Ocean. To knock one off line for any amount of time requires a direct hit by a catastrophic type of hurricane – Katrina magnitude. In other words, a perfect bullseye with the perfect bullet. Not impossible (as we know). But rare. Natural gas traders have learned this lesson the hard way. That is why media reporters often wonder aloud (especially) later in the hurricane season, why natural gas prices are not rallying when storms lurk in the Atlantic, Carribean or even the Gulf. Trade StrategyBonnie brought out the public buyers of natural gas earlier this week but the trade is already discounting the possible effects of the storm. However, we are not in the business of predicting the daily direction of natural gas prices. Making money with option selling only requires selecting price levels the market will not reach over the long term. To that end, selling deep out of the money puts and calls appears to be a solid income strategy in the current environment. Recent volatility due to fund buying and storm coverage has inflated option premiums on both sides of the market. Late season electricity demand and future impending storm threats should be enough to keep the market somewhat supported. Yet, the market’s continuing supply overhang should serve to temper any short term bullish enthusiasm. The exception here would be a true- Katrina like storm moving into the Gulf at which point closing any short call positions is the safe choice. We like selling puts on weakness and calls on strength to take advantage of current volatility. This is the time of year where call premium can often be found at the “absurd” strike price levels we describe in The Complete Guide to Option Selling. Rapid time decay can often be the norm in this situation, especially if there is no storm activity for 2 -3 weeks in August or September. As an option seller, you must constantly seek out markets with volatility. Volatility is the main factor that creates “overpriced” options. August and September are often the best months for finding this in Natural Gas. Disclosure: No stocksComplete Story »

Energy Burrito submits: Trust me on this one, it's not as farfetched as it first seems. Commodityworld is a big place, and there have been a number of commodities in the news recently, some familiar to energy, and some not. So let's take a closer look at some of these headline grabbers, through their natural comparisons to our pixelated friends from Toy Story.A Crude TailWhat first sent me on the Toy Story tangent is the way that crude oil has been following equities recently. I know the relationship has been somewhat apparent over the last eighteen months or so, but this relationship has tightened even more in recent weeks. For July, the correlation between the S&P 500 and the first-month WTI price has been a remarkably strong +0.93 (correlations can run from + 1.0 to -1.0), which makes me draw the analogy with Slinky the dog. Equities represent the head, and crude is , erm, the rear. Corporate earnings surprises are causing the excitable head of the dog (equities) to lead the charge for risky assets. This leaves crude at the other end of the slinky, being whipsawed around, yet following nonetheless. No tail wagging the dog here, crude is ignoring its own fundamentals for the most part, and being easily led.Complete Story »

David White submits:The Baltic Index has fallen dramatically. This is a good barometer of the strength of Chinese commodities buying. Commodity prices are coming off their lows, but they are still weak. Some pundits argue that the Chinese will stop their economic tightening as the Chinese economy has slowed significantly (GDP down to 10.3% growth from 11.9%). Many pundits conclude that commodities prices will go up dramatically. There are problems with both of those points (commodities rising and no tightening). First China may stop or reduce new tightening measures. However, they have already decided on a 5% materials tax, and the Chinese government seldom changes its mind on a course of action. This tax has only been dictated for one province so far and only for oil and gas. It is supposed to be put into place in all provinces, likely within a year. I apologize for not having the exact schedule. Perhaps this will happen by Christmas. The materials tax is supposed to be expanded to include most major materials such as coal, iron ore, etc. When all of this happens, it will significantly affect GDP growth. It will act to depress commodities prices. I note the government says the tax rate may vary on the additional commodities. The government clearly wants to limit oil and gas use more than that of other commodities.Complete Story »

David White submits:The Baltic Index has fallen dramatically. This is a good barometer of the strength of Chinese commodities buying. Commodity prices are coming off their lows, but they are still weak. Some pundits argue that the Chinese will stop their economic tightening as the Chinese economy has slowed significantly (GDP down to 10.3% growth from 11.9%). Many pundits conclude that commodities prices will go up dramatically. There are problems with both of those points (commodities rising and no tightening). First China may stop or reduce new tightening measures. However, they have already decided on a 5% materials tax, and the Chinese government seldom changes its mind on a course of action. This tax has only been dictated for one province so far and only for oil and gas. It is supposed to be put into place in all provinces, likely within a year. I apologize for not having the exact schedule. Perhaps this will happen by Christmas. The materials tax is supposed to be expanded to include most major materials such as coal, iron ore, etc. When all of this happens, it will significantly affect GDP growth. It will act to depress commodities prices. I note the government says the tax rate may vary on the additional commodities. The government clearly wants to limit oil and gas use more than that of other commodities.Complete Story »

Matthew Bradbard submits: Oil started the week at $76 and looks to end the week around $76. The trend line that was broken on Tuesday and has previously served as resistance now has become support. Aggressive traders could buy dips that hold that line; at $75.75 in September. It is a positive sign oil held up in the face of a falling stock market, but we have a tough time getting too bullish. Keep your positions small until the picture gets clearer. October call spreads remain the play in natural gas for our clients. Next week we would like to see a settlement above the 50 day MA; in the September contract that level is $4.64. A false breakout in equities - even positive earnings news, a Goldman (GS) settlement and regulation cannot hold this market up. Clients are going to continue selling rallies. Scale into September ES shorts; clients are positioned in put spreads expecting a test of 1000. Treasuries finished the week higher as is again looks to be the flight to quality as investors flee other asset classes. Indices down should equal Treasuries up in the weeks to come.Complete Story »