This week the US Treasury will flood the bond market with sales of short and long term bonds.
Energy traders will be very alert to bond buying coverage. Should the demand for bonds fall short of expectations, watch for the US dollar to continue its fall vs. the euro, paving the way for more gains on crude and refined products.
The bond sales by the US government are coming at a time when world wide equity markets are on the rise and general consensus has shifted to an improving world wide economy. This will further dampen demand for, "flight to safety," US bonds and cause bond yields to rise.
Investors will tend to favor the recent trend in allocating more funds to equities and commodities, seeking diversification to avoid certain inflation.
Energy investors should increase long positions on any pull backs.
Sunday, July 26, 2009
Sunday, July 19, 2009
Equities Saying Goodbye to the Recession
This week most equity investors bid their farewell to the recession. Everyone from JP Morgan Chase to Merrill Lynch boldly announced not only that the recession is over, but that growth recovery has begun. Should they be using more caution?
Equity investors make their money by predicting the future. Future earnings growth, to be specific. Generally they are looking six to twelve months ahead of the present to determine which companies will be the leaders in generating income. Yet it was a look into the past that sparked equities higher.
Goldman Sachs and JP Morgan blew away Q2 earning per share expectations. This was all investors needed to assure themselves that the banking problems are behind and solid growth can be expected.
The news this week had disappointments with CIT announcing bankruptcy is imminent. Also, Bank of America declared that difficulties still lie ahead with problem loans. Investors did not blink an eye at these warnings and continued to buy heavily on the price dips.
Energy complex traders fed off the excitement in equities and the falling US dollar to drive crude, gasoline and distillate futures higher.
All indications point to the equity trader's optimism to be justified. Energy investors would be best served by accepting the recovery is coming and base trades on a bull trend strategy. Caution and patience will be needed in waiting for pull back down days and not to chase the market at daily highs.
Equity investors make their money by predicting the future. Future earnings growth, to be specific. Generally they are looking six to twelve months ahead of the present to determine which companies will be the leaders in generating income. Yet it was a look into the past that sparked equities higher.
Goldman Sachs and JP Morgan blew away Q2 earning per share expectations. This was all investors needed to assure themselves that the banking problems are behind and solid growth can be expected.
The news this week had disappointments with CIT announcing bankruptcy is imminent. Also, Bank of America declared that difficulties still lie ahead with problem loans. Investors did not blink an eye at these warnings and continued to buy heavily on the price dips.
Energy complex traders fed off the excitement in equities and the falling US dollar to drive crude, gasoline and distillate futures higher.
All indications point to the equity trader's optimism to be justified. Energy investors would be best served by accepting the recovery is coming and base trades on a bull trend strategy. Caution and patience will be needed in waiting for pull back down days and not to chase the market at daily highs.
Saturday, July 11, 2009
'Tis The Season
Successful equity and commodity investors find that trading ideas are best analyzed through fundamental, technical, or a combination of these two techniques. For energy sector investors a third technique should be added to their arsenal, seasonal trends.
Seasonal analysis involves looking for price movements that tend to occur on a repetitive basis during a particular given time frame for a given market or sector.
The most important aspect of seasonal trading is to not expect a given seasonal trend to magically produce profits every time around. Instead, traders should use a seasonal trend as a catalyst and then make reasonable decisions regarding risk management and trade selection to exploit the potentially profitable situation.
Over the past two decades, the energy sector has demonstrated a strong seasonal tendency to advance during the late-winter, early-spring time period. By late winter, the supply of raw energy products may be running low and production may be gearing up for the upcoming summer driving season. This seasonal low supply, high demand phenomenon creates an excellent trading set up.
A couple of low cost ways to capture this trend is to buy an energy equity mutual fund such as the Fidelity Select Energy Fund (FSNEX), or buying an ETF such as the S&P Select Energy SPDR Fund (XLE). Going back 21 years to 1989 to test this theory, 20 years would have been profitable, with an average annual rate of return at 10.8%, by buying only in the months of March, April and May. In 2009 the return was a record 41.4%.
There is no way to know whether this trade will be profitable in any given year. Seven years in the above trading scenario produced returns of 3% or less. Because of this unknown and occasionally low annual rate of return, many investors who are aware of this trend will not invest. Others will be too over confident and fail to implement proper risk management in executing the trade. The investor who is aware of the risks and plans accordingly, will be rewarded with a high probability profit boost to his trading account.
Seasonal analysis involves looking for price movements that tend to occur on a repetitive basis during a particular given time frame for a given market or sector.
The most important aspect of seasonal trading is to not expect a given seasonal trend to magically produce profits every time around. Instead, traders should use a seasonal trend as a catalyst and then make reasonable decisions regarding risk management and trade selection to exploit the potentially profitable situation.
Over the past two decades, the energy sector has demonstrated a strong seasonal tendency to advance during the late-winter, early-spring time period. By late winter, the supply of raw energy products may be running low and production may be gearing up for the upcoming summer driving season. This seasonal low supply, high demand phenomenon creates an excellent trading set up.
A couple of low cost ways to capture this trend is to buy an energy equity mutual fund such as the Fidelity Select Energy Fund (FSNEX), or buying an ETF such as the S&P Select Energy SPDR Fund (XLE). Going back 21 years to 1989 to test this theory, 20 years would have been profitable, with an average annual rate of return at 10.8%, by buying only in the months of March, April and May. In 2009 the return was a record 41.4%.
There is no way to know whether this trade will be profitable in any given year. Seven years in the above trading scenario produced returns of 3% or less. Because of this unknown and occasionally low annual rate of return, many investors who are aware of this trend will not invest. Others will be too over confident and fail to implement proper risk management in executing the trade. The investor who is aware of the risks and plans accordingly, will be rewarded with a high probability profit boost to his trading account.
Saturday, July 4, 2009
Crude and Products Break Support
The strengthening US dollar helped to bring crude and refined products below support levels last week. Gas futures led the way by breaking $1.90. Crude followed gas future's lead by closing the week under $68.
The US dollar is being buoyed by a combination of continuing loss of jobs in the US and speculation the European Central Bank will be forced to lower interest rates to boost a very weak European economy. It is a short term flight to quality, that will likely see the euro back in demand by beginning of next year.
Gas prices historically tend to drift lower after the 4th of July weekend's peak driving season. The probability of the lower trend continuing is strengthened by weak demand for gas and diesel. However, stay tuned to the weather forecasts. It only takes one major hurricane in the gulf to swing the market.
The US dollar is being buoyed by a combination of continuing loss of jobs in the US and speculation the European Central Bank will be forced to lower interest rates to boost a very weak European economy. It is a short term flight to quality, that will likely see the euro back in demand by beginning of next year.
Gas prices historically tend to drift lower after the 4th of July weekend's peak driving season. The probability of the lower trend continuing is strengthened by weak demand for gas and diesel. However, stay tuned to the weather forecasts. It only takes one major hurricane in the gulf to swing the market.
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