Spreads And Ags

Spreads and Ags

We continue to advise investors to trade very cautiously, with less than half of normal position size and fewer than normal positions, keeping most of capital in T-bill cash, until this market begins to rally consistently on high volume and strong breadth.  Whenever the S&P rallies and retraces between 38%-62% of a prior downleg and then reverses lower on high volume, then start looking for shorts.  Try to avoid longs unless something very unique materializes.  Pairs trades should be used sparingly as well.  Making a small profit and consistently avoiding very much risk is usually the key to successfully navigating bear markets.

Another pair we're watching closely for a potential trade is Natural Gas over Oil, UNG/USO (created by buying the ETF UNG and selling short an equal dollar value of the ETF USO).

 
Chart 1:  UNG/USO pair broke out of H & S bottom and could be bought on move over 0.58.  Crtsy Bloomberg

The UNG/USO spread, shown in chart 1, has carved out a huge head & shoulders bottom.  Natural Gas has become so cheap relative to crude that substitution is occurring.  Therefore if UNG/USO can breakout above 0.58, investors might consider buying the pair with stops under 0.53 for a potential recovery of natural gas versus crude. 

Other markets that are holding up well include gold, which looks poised to move higher either now or after one more decline into a February low, and grains, which are soaring to new highs.  Fortunately there are ETF's like GLD and JJG to take advantage of both.  Today's USDA report was quite bullish for Wheat and Soybeans.  If today's highs can be taken out next week, the grains look poised to continue on another leg higher that stock traders may want to exploit.  As you can see from the top and bottom panels of chart 2, JJG is in a strong relative strength uptrend versus both the S&P and versus commodity indexes as a whole.

 
Chart 2:  Grains can still be traded on long side and are in runaway bull trend.  Courtesy Bloomberg

Over the next few weeks, we'll be looking at some areas where small investment could be considered cautiously in the current environment, including pair trades like last week's EWM/EWT, potential pairs, like this week's UNG/USO on a breakout, and less correlated vehicles like GLD and JJG.  Keep you trading light and your portfolio dominated by T-bills but look for pairs, shorts after rallies, and uncorrelated areas for some trades to beef up returns while waiting for a more bullish market environment.

For many weeks now our long/short strategy remains 100% on the sidelines and in T-bills right now.  It will take strong breadth and volume rallies in stocks and weaker volume and breadth declines before we would consider venturing into any net long exposure in global equity markets now.

We continue watching yield curve steepening plays like NLY and ANH as potential longs, as well as strong less correlated markets like GLD and JJM, and pairs like EWM/EWT and UNG/USO on a breakout as light trades in the current environment.

For those not familiar with our long/short strategies, we suggest you
review my book "The Hedge Fund Edge," my course "The Science of Trading," my video seminar, where I discuss many new techniques, and my latest educational product, the interactive training module. Basically, we have rigorous criteria for potential long stocks that we call "upfuel," as well as rigorous criteria for potential short
 stocks that we call "down-fuel." Each day we review the list of new highs on our "Top RS and EPS New High List" published
on www.midasresourcegroup.com for breakouts of four-week or longer flags, or of valid cup-andhandles of more than four weeks. Buy trades are taken only on valid breakouts of stocks that also meet our up-fuel criteria. Shorts are similarly taken only in stocks meeting our
down-fuel criteria that have valid breakdowns of four-plus-week flags
 or cup and handles on the downside. In the U.S. market, continue to only buy or short stocks in leading or lagging industries according to our group and sub-group new high and low lists. We continue to buy new long signals and sell short new short signals until our portfolio is
100% long and 100% short (less aggressive investors stop at 50% long
 and 50% short).

This past week in our US selection methods, our Top RS/EPS New
Highs list published on www.midasresourcegroup.com had no valid trades in either direction. This strategy is now 100% in cash T-bills awaiting a better environment and some valid signals in individual stocks, with a bias to the short side (especially after a further rally). 

The chart below continues to show that now both Top RS new highs (available on www.midasresourcegroup.com) and Bottom RS New Lows are at very low levels, and neither has an edge of over 40 versus the other - meaning that the environment is not very good for longs or for shorts.  Let's wait until breadth is clearer and signals proliferate before risking precious capital in this treacherous environment therefore.