Oil, Hedging, Commitment of Traders (and stuff)

I wanted to update a post I made a month or so ago regarding oil prices, and go into some further detail because the price of oil is so important to our markets and economy.

First, a detailed study of oil prices in relation to stock prices shows that if oil rises about 75% or more on a year to year basis, that has been bad for stocks over the next 12-18 months. We are definitely in both of those categories currently (high oil, bad stock performance). Anyone could get much more detail by reading The Oil Factor by Stephen Leeb.

My previous post had suggested that oil prices were starting to show technical weakness and possibly some relative topping behavior. Not much has changed since then as far as technical indiactors. However, I wanted to mention some other data that will better clarify the fundamental outlook and see what the "smart guys" are doing.

There is a report published each week breaking down commodity trading by how many (futures) contracts are being held and who is holding them. The report breaks it down into commercial hedgers, large speculators, and small speculators.

Commercial hedgers are the smart guys. They are traders who are trading for large companies and are hedging against future price increases. So Southwest Airlines, or Fedex, etc. who use huge amounts of oil will buy futures contracts locking in today's price of oil which must be delivered to them at some date in the future. They actually want the oil to physically be delivered for business use. They know their business inside and out and tend to buy contracts near low points in oil prices......they are smart.

Speculators do not actually want the oil, the just try to profit from price swings and have no intention of receiving actual oil. Both large and small speculators tend to be worse (or downright bad) at timing the market turning points and understanding the underlying fundamental supply and demand.

I mention this because we are at an interesting point right now. The smart guys are buying lots of oil (to an extreme level) because they obviously expect the price to go up. The speculators have been selling oil to a relative extreme level. That would indicate that oil is much more likely to go up in the near future. However, the interesting thing is that the price of oil is at all time highs while this is happening, rather than at a low point which is historically when you see such a thing. My basic interpretation of this is that we may be in a still developing "bubble" where prices could rise significantly yet before undergoing a true bear market or large correction.

Time will tell, but if you are interested in profiting from this potential move, USO, DBC, and DIG are ways to basically buy oil through the stock market without actually trading the commodity. There are other funds as well, but USO is the most widely used.

Basic conclusion..........treat any pull back as a potential buying opportunity once things look favorable for your trading system again.

Pete

QQQQ Option Trades

I bought both August and July 45 calls on QQQQ. The current price is about 2.00 for the August and 1.25 for the July calls. I will use those prices to track the trade.

As a side note, I would consider AMZN as a short trade or put option trade.

Also, IPSU is pulling back off what I am considering a breakout move. I would consider this a buying opportunity.

Pete

New QQQQ Option Trade and Other Stuff

Move the stop loss on SRS up to 93.00.

I am purchasing August 45 Strike calls on QQQQ and will track this on the blog. There were market wide signs of at least short-term bottoming today. The April gap ups on the Nasdaq have been completely filled now in conjuction with a high volume bullish candle pattern today.

I think it is time to get aggressive for short-term trading. Stocks I am considering are CMC, ROST, NETL, GGB.

For anyone trading (shorting) GLD that would have been a stop loss today the way I trade. I am holding some (losing) put options on it still. There has been a mixed relationship in gold and stocks in recent months. At some market bottoms gold has topped, and occasionally they have moved together. With the markets appearing to bottom now, I will give GLD a chance to pull back, but the break of what I had suspected to be the "C" leg of a triangle pattern, is not ideal and should be grounds for exiting any trade that does not have limited risk like an option does. At minimum, a relatively tight stop loss should be in place for protection.

Pete

QLD Update

QLD opened at 74.30 today and that is the price I will use to track this trade. As mentioned before, I would definitely place a stop loss order on this trade around 71.00 and even up to 72.00ish because I don't think that we have seen a bottom that will hold for weeks. There is potential for further sharp declines.

Pete

QLD Trade, SRS Update

In my last post I mentioned that there were signs of a potential short term bottom in place. More of those signs came on Friday, at least as far as I am concerned. While I also mentioned that I didn't plan to recommend many bullish trades in this downtrend, I think now may be a good opportunity to get a bit aggressive. I have ignored the last 3 or 4 oversold readings in the short term indicator, but this one looks better.

Both NYSE and Nasdaq had very heavy volume today. Volume was heavier in the Nasdaq than at the March bottom and only a bit lower than a few days in January and last August which were very high fear sell offs. Also the volume on DXD, which is the 2X inverse fund of the Dow/DIA, spiked to its highest level since the inception of the fund. I believe these are indications of a short term climax bottom.

The Nasdaq and QQQQ ETF nearly completely filled a large open gap up from April that I had mentioned a couple months back. Then price reversed intraday to close near the open to form a hammer/doji candle stick. These three factors (gap retracement, high volume, reversal candle) create what I think is a good bullish set-up.

I suggest purchasing QLD on Monday at a limit price of 75.50. While I haven't suggested specific stops on past trades I would definitely place one on this trade. 71.00 may be a good stop level that could allow a little more downside but keeps the risk within reason.

Also, move the stop on SRS up to 92.00.

Pete

It's Scary That Traders Aren't More Scared (also SRS update)

As the Dow is making new lows below the January lows, it is tempting to start looking for a market bottom. I find one of the simplest and most reliable tools to gauge whether the market is bottoming is a moving average of the equity or total put/call ratio. I like to look at both 5 and 20 day averages and then look for crossovers of the averages after they get to historically extreme points. I also like to see the data in relation to standard deviation bands as that will help to locate relative extremes. In my estimation, we are a ways off before those get extreme enough to call a bottom.

Also, I am not an expert on the VIX but I am astounded that the Dow was able to forcefully break its January low, and the VIX is not even close to a relative extreme. I don't think there is enough fear in this measure to anticipate a bottom yet.

On another hand, it is helpful to look at volume on the indices and ETFs to help see the activity at recent market bottoms. One thing that struck me was that the volume on DXD which is the 2X inverse ETF of the Dow was very high.....higher than March, but not quite as high as January or last August. Volume will swell near market bottoms on an ETF like this because people are scared and are hedging other holdings or are trying to speculate on more downside. Based off the surge today, I think it is possible that we are very close to the completion of a first wave down in a much larger decline. So maybe we will get a couple weeks of relief, but I wouldn't bet on a multi month bounce from here.

The short-term model is oversold now, but I don't plan to suggest bullish plays when the market is in a clear down trend. I will be very selective on those.

As an aside move the stop on SRS up 90.81.

Pete

Sugar, Corn, Ethanol, and Other Stuff Too

Anybody following the grain markets (or buying boxes of cereal) knows that prices are up. Why? and how do you take advantage?

I am not a fundamental expert, but I can rehearse to you some of the underlying supply and demand factors.

CORN (yellow didn't show well so I used blue font, because there is also blue corn)
There is relatively new legislation forcing our country to use more ethanol in fuel. This demand has been met mostly by using corn starches to make the ethanol. This has driven up corn prices for a while.

SUGAR (this is the color of sugar in the raw)
Sugar is probably the most efficient and least socially harmful way to create ethanol, though this has not been used as much. I suspect with the effects of world hunger from less corn for food, and with the increasing price of corn, there will be increased demand for sugar in coming months/years.

I have tried to take advantage of both these markets though I do not trade commodities. For a person who does not trade commodities, you depend on companies with exposure to the underlying market or to ETF's that track commodities.

DBA is an ETF that tracks corn, wheat, soy beans, and sugar. I have options on this ETF which expire in October. IPSU and CZZ are companies that produce and refine sugar. I have options on IPSU which expire in October. I feel that those securities will give a person a chance to benefit from these trends. I think both could have a ways to go before saying they are too high to purchase and still expect good gains.

If anybody wants further analysis of these markets or trading/investing ideas, please post a comment/question.

Pete