What’s Holding Natural Gas Back?

In 2015, Natural Gas has been a frustrating market to trade for the both the bulls and the bears, as it has remained in a range between $2.50 and $3.00 for most of the year. I don’t know what direction this range is going to resolve in, but as I’ll explain below, the weight of evidence suggests that it’s appropriate to approach this market from the long side in the coming months.

The first thing I want to point to is seasonality. Data compiled over the last thirty years suggests that we are currently entering the strongest two months of the year for Natural Gas prices, with gains averaging 13% and 8.8% respectively. The second thing that catches my attention is the net long positioning of commercial hedgers, which is currently hovering around all-time highs, as it has been since late last year. Lastly, although public sentiment has come off of its lowest levels of the year and is peaking its head into neutral territory, pessimism is still quite abundant relative to what we’ve seen throughout history.

Overall, I’d say the backdrop we’re currently provided by sentiment and seasonality suggests that we look at this market from the long side, but let’s see what clues price action is giving us.

The weekly chart is showing us that prices are clearly in a structural downtrend, as shown by the series of lower highs and lower lows, as well as a downward sloping 200 week moving average. More recently, prices have found some support around the $2.60 area and has been carving out a base above that level for most of the year. Despite momentum diverging positively for most of the year, we’re beginning to see it slowly lose grip of this trend line support, which isn’t great. For the time being, we remain rangebound between $2.55 and $2.95, with some overhead resistance near $3.10 which represents support from 2012 and 2013.

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Sugar Mean Reversion

When I don’t have much conviction in terms of the Major US Indices, I turn to other markets to look for non-correlated opportunities. I’ve been stalking Sugar futures for a long time, but recent price action has begun to suggest that the mean reversion we’ve all been waiting for is finally ready to get going.

First off, public sentiment has been bumping up against multi-year lows for the past year or so and commercial hedger positioning is at multi-year extremes on the long side (though relatively flat in terms of net positioning). In terms of seasonality, we’re coming out of the 2nd worst month of the year for Sugar and entering a 3 month period that has, on average, seen positive returns.

Given that relatively bullish backdrop, let’s take a look at price.

It’s clear from the weekly chart that prices are in a structural downtrend, but have started to gain traction at a key level of support. After a brief false breakdown below the ’08 lows, prices moved higher off of this confluence of support while momentum positively diverged. I’d like to see prices close the week at the highs, but there’s no doubt that this is constructive action. 

Was That The Bottom In Oil?

“Was that the bottom?” is the question most market participants are asking regarding Crude Oil, and the energy markets as a whole, after today’s steep rally. I have no idea if this is a bottom or not, but what I do know is that, from a risk management perspective, the risk/reward has not been better for the bulls in months. At the end I’ll reiterate my bottom line in more detail, but for now I’ll walk you through the information I’m looking at and allow you to make your own conclusions.

First off, let’s see what has happened other times in history when crude has rallied 10% or more in one day. As you can see from the data below, the average returns are less than stellar in the short term, but improve as you look out a year. For a swing trader looking to catch a bounce, this backdrop is not exactly encouraging, but is just one of many pieces of evidence.

From a public sentiment perspective, my data suggests that we’ve not seen this level of pessimism in the Oil market since 2002 and commercial hedgers are positioned the same way they were in mid-March of this year before prices rallied sharply. Also, prices have ignored the bullish seasonal tendencies of the summer thus far, but that positive seasonal tailwind remains intact throughout September.

Goals Update

In early 2015, I set some goals for the year with the largest of them being securing a full-time job for when I graduate next year. Given that I’ve accomplished the majority of those goals, and will be starting full time at Ernst & Young next fall, it’s probably time to update my goal list for the period between now and Oct. ’16.

Professional Licenses: 

• Pass all parts of the CPA exam
• Pass the CFA Level I (December ’15) and the CFA Level II (June ’16)
• Pass the CMT Level I (May ’16)

Markets Related: 

• Social Media
  • Reach 30k followers on stocktwits (currently at 14.2k)
  • Reach 2k followers on twitter (currently at 820)
  • Combined 30k total page views between DRC and Brunicharting.com (currently at 1.2k/month)
  • Have one piece of content featured on ReformedBrokers “Hot Links” (A stretch goal, I know)
• Trading
  • Learn more about futures trading and redesign my process around trading futures and ETFs to reduce risks of independence issues while I’m working at EY
    • Begin paper trading to test my process and build confidence with trading new financial instruments
  • Continue to find ways to automate / speed up the weekend analysis process, as well as improve weekly game plans and trade execution
• Personal Finance:
  • Add a personal finance section to both blogs to teach and promote basic financial literacy / financial planning concepts
• General knowledge
  • Read one book per week on market related topics
  • Spend one hour per day reading and taking notes on blogs / articles / publications

Career / Personal Finances Related:

• Find part-time jobs / internships to both further build upon and expand my current skillsets/resume and make some money to pay down 2/3 of student loans
  • Utilize the upcoming tax season to get some tax exposure
• Networking
  • Attend one networking event per month
  • Continue to utilize LinkedIn and other social media, as well as online databases to connect with professionals to garner advice / feedback  – once per week
• Continue to build credit and manage access to capital / cash flow
  • Open a few additional credit cards, raise limits on current ones
  • Have access to $15k / a credit score above 750 by Oct. ’16
  • Continue to research ways to reduce taxable income / create passive income
  • Finalize my long term financial plan once my start date gets closer and I have more visibility

Health & Exercise: 

• Exercise:
  • Strength training / cardiovascular activity 3 days per week – stretching / yoga 2 days per week (yeah, I said yoga)
  • Perform a muscle-up with strict form
  • Perform a handstand pushup
  • Run a 5k
• Health
  • Get a minimum of 5 hours of sleep per night
  • Track diet and exercise plan through the MyFitnessPal app

I’m sure there will be additions to this as I continue throughout the year, but I think it’s important for everyone to have a general roadmap for where they’d like to be in the future, as well as a plan on how they’re going to get there. I didn’t post it here, but for each of these bullets I have a specific plan or approach that I’m using to meet that goal. Not only does this post serve as a means to keep me accountable, but hopefully it encourages you to create some goals for yourself to tackle in the days/weeks/months/years ahead.

As always, if you have any questions feel free to reach out and I’ll get back to you as soon as I can.

The Week Ahead

During corrections, it can be difficult for those involved in financial markets to figure out what exactly to do. The media often portrays market participants in two oversimplified groups; “Investors” and “Traders” The problem with this, is that within these groups there are market participants with many different financial goals, strategies, timeframes, etc… Yet blanket statements are constantly offered as advice to these general groups, regardless of what their individual circumstances may be.

The truth is, it’s impossible for anyone to tell “you” what to do during a market correction. Whether you’re a trader or a long term investor, hopefully you have a plan to reach your goals as a market participant and are more than prepared to handle common scenarios like this one.

That being said, I’m going to summarize below what I think certain market participants will be doing tomorrow, and as this market action continues to develop.

Day Traders: Pressing shorts through intraday lows or pullbacks into VWAP / trying longs against intraday lows with tight stops.

Swing Traders: Covering shorts partially and trailing stops. Nibbling long into potential support / waiting for bounces to re-short into.

Trend Followers: Continuing to raise cash / taking exits on long term positions (if not already out). Transitioning views from long to short and scaling into shorts.

Option Traders (Regardless of Timeframe): Selling puts / put spreads to express bullish views on stock while taking advantage of a spike in implied volatility / options premiums. Utilizing stock repair strategies for longer term positions.

New / Novice Traders: Probably struggling / losing money, but learning a lot during the process (as long as they are following a plan focused on their long-term development as a trader).

HFTs / Algorithms: Scalping, as usual, and running stops to exacerbate volatility and frustrate traders.

Long Term Investors: Going to their day job, continuing their 401k & other retirement contributions according to their long term plan, and not worrying about the day to day fluctuations of the stock market. Okay, they may call their advisor a few times, but hopefully he/she is good enough to talk them off the ledge and keep them on track with their long term plan.

The Bottom Line: Obviously I went through the exercise of generalizing market participants just as the media does, except on a slightly more granular level, but I think it’s helpful to have an understanding of the many different perspectives out there.The exact strategy, execution, and risk management will clearly be different, but  I do think this is the game plan of many people heading into the week ahead. At the end of the day, there’s not right or wrong way to handle the current market environment. The important thing is that, in volatile times like this especially, you have a plan for how you’re going to approach the market to meet your financial goals, whatever they may be.

As always, if you have any questions feel free to reach out and I’ll get back to you as soon as I can.