Most of the trading we do is based on some form of mean reversion. The idea is that a market that has moved too far away from its predicted value area is apt to return. This is the equivalent of buying low and selling high in a sideways market. The primary difference in our methodology is that we use the commercial traders within their respective markets to provide us with the two necessary keys required to make this work.
The equity markets have been THE place to be for capital appreciation over the last few years. Last year saw the Dow Jones under perform with a 9.6% return compared to the S&P 500 at 13% and the Nasdaq 100 at a whopping 19%. In spite of the impressive returns provided by the stock index futures last year, there were still periods of flatness and even outright declines. In fact, the Nasdaq had a decline of more than 10% from peak to trough at one point last year, in spite of its 19% return for the calendar year. This week, we’ll discuss a method of applying the commercial traders data from the weekly CFTC Commitment of Traders reports to the equity markets in an attempt to preserve profits gained on the long side of the markets as well as profiting from forecasted declines.
Moore Research is the virtual leader in seasonal commodity analysis. Their research shows that 14 out of the last 15 years that May unleaded gasoline futures have rallied between early February and early March. One of the primary reasons for this rally is the beginning of the shift away from winter gasoline blends and the production of summer blends heading into the Memorial Day party time. Their research is based on statistical analysis that describes what, “normal” seasonal market behavior is. However, there is a considerable case to be made that the current situation in the energy complex is anything but, “normal.”
We published, “Picking a Bottom in Natural Gas” on January 15th. The recent decoupling of the declining energy sector from the broader stock market is nurturing the seeds of future growth in the economy as a whole. This is providing early buyers in natural gas futures with some hope that as the energy and stock markets have decoupled so too will natural gas from the broader energy sector.
The Frozen Concentrated Orange Juice (FCOJ) futures have been trading sideways for since last winter’s Polar Vortex spooked the market. What we’ve seen since has simply been a range bound, unexciting market to which, I say, “Thank you!” Trading for a living isn’t about excitement. It’s about making an easy living in the toughest way possible. Therefore, when a trade sets up with our methodology in a low volatility environment, I can be reasonably sure that even if I’m wrong, it will be manageable. Today’s orange juice trade combines our Commitment of Traders (COT) Buy signal along with some late winter seasonal analysis from Moore Research.
This has been a tremendously active week with big volatility and important market turns. We have to begin with last week’s gold platinum spread. We outlined the case in our Gold, Silver, Platinum and Copper Outlook. This week, April platinum traded down to nearly a $50 per ounce discount to April gold. Currently, this spread has rebounded to approximately a $5 discount. That’s as much as $4,500 profit depending on the entry point.
We’ve been following the oat futures market carefully while waiting for an actual buy signal to setup for us to enter. There are multiple confirming factors of the market trying to put in a low before rallying through the expiration of the March contract. We initially began looking at this oat trade based on the seasonal pattern, commercial build in position and the sideways technical action in a declining volatility environment. This trade never materialized as the market feel through the bottom of its consolidation. This time around, the market has provided a classic COT long entry.