Tag Archives: gary-bourgeault

ETFs Driving Big Gains For Oil Shorts

Summary Money moving in and out of long and short oil ETFs, as low oil price visibility creates more uncertainty. Retail investors should focus on only holding for a very limited time period if they go short. There is nothing to suggest oil prices can rise to sustainable levels in the near future. Traders with a high tolerance for leveraged risk have been making a killing by shorting oil in 2015, led by a number of ETFs that have been, in some cases, up well over 200 percent on the year. There has been a lot more volatility than usual in these types of instruments, as headlines contradicting one another on the movement of the price of oil have money moving in an out of ETFs catering to short and long outlooks for oil. Some large players have been short oil all year, but for the retail investor, it would be wise to take a position in these ETFs for a very short period of time. Some ETFs even suggest and encourage that to their investors, saying in many cases they’re built to hold a position for only one day. All the volatility and inflows and outflows reinforce the fact no one really knows where the price of oil will go, with some like Goldman Sachs saying it could plunge to as low as $20 per barrel, and OPEC recently saying it’s looking at it rebounding to $80 per barrel. In the case of OPEC, that’s primarily because it believes a decrease in American production will begin to offset excess inventory, and start to drive up prices. That is based upon its assessment it has beaten down a lot of the tight or shale oil drillers, which it believes will be a sustainable event. I disagree with that because of the plethora of drilled but uncompleted (DUC) wells, which can quickly and inexpensively be brought online in response to an increase in the price of oil. The truth is, as the market is showing, it could go either way. ETF oil shorting products Before getting into a couple of products and some interesting facts about their performance and why money has been changing hands, it’s worth looking at a couple of elements related to these types of ETFs. As already mentioned, most if not all retail investors should be thinking very limited holding periods for ETFs that short oil. They are extremely volatile, and can move up or down very quickly. If using leverage to make the trade, when including daily rebalancing, the short term movement can be very different than what is expected of the long-term performance data of the ETF or ETN. At this time risk/reward is worth the plunge for those that have some spare capital and a high tolerance for risk. There has to be the belief the price of oil will continue to go down to enter this play. I’m not in this particular play at this time, but I’ve done it with other commodities, and there is a lot of money to be made if you’re right in your assessment of the market. That said, leverage is becoming more of a risk as things get murkier, as conflicting outlooks suggest the underlying catalysts for either direction are no longer as sure – at least in the mind of traders – as they were earlier in the year. That’s one of the major reasons, even as oil has remained under pressure, a lot of money has been taken off the table. VelocityShares 3x Inverse Crude Oil ETN (NYSEARCA: DWTI ) Since DWTI has been one of the top performers in the sector in 2015, we’ll take a look at it first. DWTI offers 3x or 300% exposure to how the S&P GSCI Crude Oil Index ER performs on a daily basis. It does have a fairly high annual fee of 1.35 percent. Since this and others are so volatile, I’m not going to even attempt to look at how much it’s up for the year. It changes significantly in a very short period of time, as you can see in the chart below. Its prospectus states it’s “suitable” to be held by most investors for one day. This is a short-term play where it simply doesn’t matter. Again, larger investors can hold longer if they believe the trend will remain down, but now that the price of oil has fallen so much over the last year, leveraged players are under increasing risk if things surprisingly and abruptly turn around. Daily average volume is a solid 1.8 million shares, but as with its share price, its asset base can be very volatile. (click to enlarge) source: YahooFinance PowerShares DB Crude Oil Short ETN (NYSEARCA: SZO ) Since SZO doesn’t use leverage, it is probably one of the safer instruments in this space, if the term ‘safe’ can be applied. It offers inverse exposure to WTI crude, tracking the Deutsche Bank Liquid Commodity Index, which covers how well a group of oil futures contracts are performing. Over the last three months it is up about 30 percent, and has an expense ratio of 0.75 percent. It trades far less than DWTI, with a 3-month daily average of approximately 35,000 shares. Not nearly as popular as DWTI, it only has net assets of about $28.59 million. (click to enlarge) source: YahooFinance ProShares UltraShort Bloomberg Crude Oil ETF (NYSEARCA: SCO ) My final short to look at is SCO; its goal is to attempt to provide double the daily inverse return of the performance of the Bloomberg WTI Crude Oil Subindex. Over the last three months it has generated a return of about 56 percent. Total expenses amount to 95 basis points. I wanted to highlight SCO because it has been one of the top performing ETFs this year, and yet over $175 million has been removed from assets, according to Bloomberg. That points to growing skittishness over the uncertainty the price of oil is going to go. (click to enlarge) source: YahooFinance The United States Oil ETF (NYSEARCA: USO ) Since USO is a long play on oil it is included to confirm there is a lot of money moving in and out of the long and short ETFs, and not all of it is intuitive. With USO, it has enjoyed near $2.75 billion in new cash investment, even though it has lost over 50 percent of its value so far in the last twelve months. There is no doubt this represents investors believing there is going to be a rebound in oil prices; at least in the short term. This, combined with the outflows from SZO, reiterate concerns over the risk associated with using leverage to short oil, and having no visibility on where the price of oil is going. (click to enlarge) source: YahooFinance Conclusion Shorting oil using ETFs has been very lucrative this year, and my thought is there is a more room to make money for those shorting oil within a limited time frame. For myself, I wouldn’t use leverage any longer because of the low visibility factor concerning oil prices, and I wouldn’t stay in longer than a day. I’m primarily speaking to retail investors here, although until there is more clarity in the short term, larger investors will likely play by similar rules, if they continue to use a shorting strategy in oil at all. My final thought concerning oil is a lot of the headlines are misleading because of the fact OPEC know larger shale producers can put production on hold if the price of oil continues to fall, and if it rebounds, can quickly respond within less than a month with its DUC wells. So the idea it can shut down a competitor like it has in the past, in my opinion, is a misguided one. Shale oil isn’t Russian oil or other types of oil that may take a lot of time to get back into production once it has been shut down. Companies with shale exposure can simply bide their time and wait until the price of oil moves up, and they can almost immediately start production. OPEC can do nothing to stop the larger shale companies. And even if the smaller capitalized companies go out of business, it doesn’t take away the fact the oil is still there. Larger companies will acquire the assets. OPEC has signaled it will continue to produce oil in order to maintain market share. While that has resulted in U.S. companies cutting back on production, there is so much supply out there, it will take a lot more to provide support for oil prices. There is a message being sent, but OPEC doesn’t have the teeth it had before shale, and going forward it has to deal with the fact that once production is lowered and prices start going up, shale companies will simply ramp up production and the cycle will continue. That means eventually OPEC will have to lower production if oil price are to increase at sustainable levels. With Russia so dependent on its oil for revenue, it’s not going to do so, which means this is a long-term trend that at this time, doesn’t have an answer outside of OPEC losing market share. For that reason these ETFs built to take advantage of low oil prices, will make money for those willing to take the risk and holding for very short periods of time. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

1 Unique Method To Successfully Play A Volatile Market

Summary One way to make money no matter what the stock market is doing. Choosing the right sector is the key – in my case is was specific commodities. Knowing consistent price movements over time will determine the trading spread to work within. There is no doubt we’re in a stock market environment ruled by fear, as confirmed by the extreme volatility in the movement of the various indices. Much of this was triggered by the crash of the Chinese stock market, but even before then there was a growing concern about the dizzying heights the market had shot up to without a correction. The U.S. has went through a mini correction, but many believe we need a deeper and more prolonged one to bring share prices back in line with actual values of companies Other factors given as reason for volatility are low interest rates, which have tempted companies to be more reckless in their spending; uncertainty concerning whether or not the Federal Reserve will raise interest rates; slowing Chinese economy; commodity deflation; and signs manufacturing in America is slowing. I could add many more to the list. Together what it says is investors no longer have some clarity on the future, and that has been the impetus behind the extreme volatility in the market. When visibility is down and parts of the global economy collapsing, it generates an environment of fear. And that’s where we are today. One thing we must do as investors is to ignore the endless financial news headlines about the last big plunge in the stock market, and the soon-to-follow “rebound.” That’s stock price movement that historically precedes a major correction. The day-to-day movements are irrelevant. What’s relevant is if after all the movements the direction remains level or continues on down. Trading in times of fear With future uncertainty can come investing paralysis and fear, as investors move their money to the sidelines to wait to see where things go. That’s a good strategy, but there are many others that still want to find ways to grow their capital in these volatile times. I’m going to share one strategy I’ve used to capture profits in situations similar to this. As a matter of fact, it doesn’t matter whether the stock market is going up or down with this type of trade, as it has volatility built into it either way. I’m talking about silver, although I’m simply using it as a proxy for other commodities or markets that are volatile in nature. I’m going to say that again: I’m only using silver as a proxy for a number of opportunities to make money using this method. I’ve used this with silver in the past, but know of some colleagues that are using it with other commodities right now, and in your specific expertise, there could be many other sectors or segments to do the same thing. Silver trade The first thing to do is identify a highly volatile commodity that moves in predictable patterns. The one I know the best is silver, and it’s one I made a lot of money with several years ago. I decided to go with stocks and not silver options or futures. At the time I was trading was when gold and silver were still soaring, and among the top-performing and predictable silver companies at the time was Silver Wheaton (NYSE: SLW ). It was highly volatile, but it still have a primary upward share price movement, which made up for the occasional timing mistake I made, which forced me to hold it a little longer than usual. Remember, it doesn’t matter whether a commodity is going up or down in price, as long as it’s operating within a trending pattern. That’s where a lot of the risk is mitigated. The other thing is there has to be discipline in not trying to get every penny out of the trade. I always sold when the share price moved within the parameters I had put in place. Once it rose within those guidelines, I didn’t get cute, I immediately pulled the trigger and sold. Did I miss some upside? All the time. But I never regretted it. I made money on trade after trade as long as I stayed within my pre-set parameters. How was the trading performance during this time? At the best I had fourteen straight trades I made money on. Under normal conditions I would make five or six trades, and then lose on one. Keep in mind I was trading with a similar amount of money, so it was like taking 5 steps forward and one step back. It could have been even better, but within my parameters I had a holding restriction, meaning if the stock didn’t perform as expected within a specific time frame, I would sell it. That protected me from losing more than what I would make on one trade. What needs to be known In my silver trading I needed to identify the overall trend direction of silver and the daily share price movement of Silver Wheaton within that trend. Everything else I ignored. When I say everything else I ignored, I mean with the exception of something that would point to a reversal in overall trend. For example, when Silver Wheaton surpassed the $40 mark, I knew it was either going to explode in growth or move up a little more, and then start to pull back. That is how it did move, with it topping off between $46 and $47 a share. I don’t believe it ever closed at that level (during the time I was trading it), but it did reach that in intra-day trading. This isn’t rocket science. Volatile markets like silver, still have patterns within them that can be observably known, and it only takes a little research on the level of the price movements of a stock within that pattern. The only tricky part in my experience was when it not only dropped per its normal volatility, but then dropped a little more than usual for some temporary reason. If I hadn’t committed to a trading time frame, I I would have simply held a little longer and waited for it to rebound, which during the trend, it literally always did. That’s how I could hit it so many times in a row. Again, it’s understanding the flow of the pattern, which can be easily identified with any day-to-day chart. What about making money on the downside? After getting some confidence with Silver Wheaton because of my success, I started thinking about a way I could make money when the price dropped. Keeping within my preferred method of stocks or an instrument that would trade like a stock, I decided to go with ProShares UltraShort Silver (NYSEARCA: ZSL ). What ProShares UltraShort Silver does at its basic level is short silver via different financial instruments. My only problem there was I only allowed myself a certain amount of money to use with this type of trading, so I had to break up the amount I spent on Silver Wheaton if I wanted to take advantage of the downward price movement of silver. It wasn’t really a problem, but it limited my upside because of my refusal to break my discipline. That’s the key to success in this type of trading: you have to stay disciplined within your predetermined parameters. Stray outside of them and you’re likely to get hammered, even if you occasionally get lucky. What has to be watched if playing silver for upside and downside, is one of them aren’t on trend, and if it suddenly moves off trend, you could be hit hard. This is another reason I always sold when it reached the level I was looking for; whether the price of silver was going up or down. This protects you from starting to believe you know what you’re doing in regard to price movements. We can know the trends and daily movements, and within a tight trading discipline, do very well. I can’t emphasize that enough. Don’t start to think you have an inside handle on a volatile segment of the market. That’s why there has to be a system in place that is religiously followed, no matter much more that could have made on a trade. Take the gains and run. Then do it over and over again. To give an idea of how one could lose on a trade if you’re not careful and disciplined, check ZSL when it was trading at just under $5,600 a share. That happened because it was going against trend because the price of silver was moving up. On December 1, 2008, it closed at $5,598. On December 15, 2008, it closed at $3,928. You can trade against trend, but that is far riskier. I had no trouble with it, but I kept a constant eye on it throughout the day. Also understand, these were trades I would usually make within an hour or two. Rarely would I hold on longer than that. This isn’t investing, where I was analyzing the company, it’s trading, where I only analyzed price movements and the trend. I was doing this to play both volatile movements. If silver was going down in price, one could play only ZSL and drop Silver Wheaton. Conclusion Unless you have a nice chunk of extra money lying around for high-risk trading, I would stay with one trend direction and first get a grasp of its consistent daily price movements. I say that because you won’t make as much playing two different trends unless you have significant capital to put into play. You’ll have to wait for your trade to clear, which could take several business days before you have access to your capital again. And if you do that on both ends of the trade, the daily price movement could be up, which if that’s the way you’re playing it, you may have to wait a day or two before it rebounds. That means if you sell on a Thursday, you may have to wait until Tuesday before you have access to your money, and then maybe an extra day or two for the price to be positioned correctly for an entry point. If you haven’t done this type of trading before, that may seem like it’s not a big deal. But when you’re used to moving in and out of the market based upon price movements, it can seem like an eternity, and you may be tempted to get in just to be in the game. Once you decide on a commodity, or possibly a volatile stock, be sure you know the macro-economic situation, the general trend of the sector, and then the consistent price movement intervals of the commodity or company. After you have a handle on that, then develop a simple system to work within, with the most important being the price spread you will buy or sell within. You could make more money without the parameters, but you could lose more too. Under this type of discipline I’ve used it to generate significant earnings time and time again. Keep in mind I’m not suggesting to trade in Silver Wheaton here. It’s only a proxy I used because I made a lot of money using this technique with silver and Silver Wheaton in the past, and it represents the type of predictable volatility needed to make money. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.