CEA Portfolio Update – June 2015

| June 23, 2015

Losing A Battle To Win The War!

As you know, I sent out an email on June 10th, alerting you to the buying opportunity in the Chesapeake Energy $CHK.

Here’s additional insight into why we made this trade, and how it’s performing thus far.

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Well, I have to admit, our timing could not have been worse in our recent foray into Chesapeake Energy $CHK.

The day after we released our buy recommendation, shares of the natural gas producer were downgraded from “outperform” to “perform” at Oppenheimer.

That analyst’s call is sheer lunacy in my opinion…

Keep in mind, Oppenheimer still holds a $22 price target on $CHK after the downgrade.

But I digress…

Thanks to the unwelcome news, $CHK sank below our risk control price at $11.88 a few days ago.

Remember, we always utilize a 10% stop loss in our commodity ETF/natural resource stock trades to keep our downside risk contained.

And while it’s certainly disappointing to take a quick loss in $CHK, it’s not the end of the world. After all, a 10% loss is peanuts compared to the gains that will be made in this industry in coming years.

All we need is a better way to play this burgeoning bullish trend.

And here it is…

The First Trust ISE Revere Natural Gas Fund $FCG is an ETF consisting of a basket of natural gas producing companies.

All told, $FCG has 31 holdings ranging from natural gas industry giants like Southwestern Energy $SWN to small speculative producers like Magnum Hunter Resources $MHR.

Given the ongoing uncertainty in the natural gas exploration and production industry due to low prices, $FCG is a great way to immediately diversify our investment.

By adding the ETF to our portfolio, we’ll be open to all of the upside this industry has to offer, yet we won’t be exposed to unwelcome news from an individual company.

With that said, now’s the perfect time to pick up $FCG for your commodity portfolio. The ETF is trading near important technical support at $9.43 a share, which happens to be the 52-week low set earlier this year.

Here’s a chart…

First Trust ISE Revere Natural Gas Fund

WHAT TO DO NOW: 

First Trust ISE Revere Natural Gas ETF $FCG is trading at $10.07 

Buy $FCG up to $10.25 per share  

Our profit target is $16.00 or more  

Risk Control Price is $9.07 (or a 10% stop loss from your entry point)

Now it’s essential you remember why we’re making this trade…

Not only are natural gas exports scheduled to start soon (as discussed in the May 2015 monthly trade update), but there are growing signs US natural gas production will start slowing later this year.

In fact, the US Energy Information Administration (EIA) recently announced in their STEO (Short-Term Energy Outlook) that natural gas production from US shale regions will decline by 221 million cubic feet from June to July 2015.

And thanks to lower drill rig counts, it’s likely this bearish production trend continues in the months to come.

The combination of weakening supply and higher demand is a bullish sign for natural gas. And as the price of the commodity rises in response, so will shares of beaten down gas producers held in the $FCG!

 

Commodity Review

Commodity Ticker Current Value Last Month Change
Energy JJE $10.37 $10.76 -3.6%
Grains JJG $33.82 $33.53 +0.9%
Industrial Metals JJM $23.99 $25.88 -7.3%
Precious Metals JJP $55.86 $57.63 -3.1%
Softs JJS $31.80 $33.00 -3.6%
Livestock COW $26.79 $28.21 -5.0%
ALL COMMODITIES DJP $28.31 $29.14 -2.8%
As of 06/22/15

 

Energy Commodities

Trading in West Texas Intermediate (WTI) crude has slowed to a snail’s pace in recent weeks. The commodity is trading in a tight range around $60 a barrel as investors decipher incoming supply/demand data.

It’s readily apparent that neither bulls nor bears are willing to make a stand on WTI at the moment.

What do we do with our position in the Energy Select Sector SPDR $XLE?

With WTI stuck in a tight sideways trading pattern, $XLE bulls have been lulled into a slumber. The energy stock ETF slowly bled from $80 to $77 the past month as investors await a definitive catalyst to send it higher.

At this point, it’s best we just stay patient with $XLE. The large-cap energy stocks held in $XLE are trading at their cheapest valuation in years. Once bulls return to the energy space, I have no doubt we’ll see the early May highs of $83 surpassed with ease.

If you haven’t already, go ahead and add $XLE to your portfolio at any price under $79.72.

 

Grain Commodities

It was another month of uninspiring trade in grains…

Corn stayed in a tight range around the $3.60 a bushel range. At the same time, wheat made a valiant, yet unsuccessful, effort to break above multi-month resistance at $5.50.

However, there may be a technical trade developing in soybeans…

The commodity made a strong bullish move off the $9.40 a bushel mark over the past few days. If soybeans can break above $9.90 with volume in coming days, the market may be open to further upside.

At any rate, we need to keep a close eye on soybeans!

 

Industrial Metals 

It was a rather dismal month for copper. The red metal was trading at $2.80 a pound at the time of our May update.

Today it’s trading a touch over $2.60.

That’s a 7% downturn in the past month and is a clear indication of weak fundamentals for the metal.

As I’ve said many times in the past, the economic news flow out of China has to improve drastically before bulls can feel comfortable about getting long the copper market.

 

Precious Metals

The price action in precious metals is quickly going from bad to worse. As you know, gold, silver, platinum, and palladium have essentially been trading sideways since early April.

But over the past few weeks, there has been a noticeable uptick in selling pressure in platinum and palladium. These two metals have succumbed to steep losses of 7% and 11% respectively in June. One look at the chart tells me there’s additional downside in store for both metals.

What about gold and silver?

Silver closed at $15.78 today- a 2.2% loss for the session. But more importantly, today’s downturn puts the metal at risk of further downside to $15 in coming sessions.

The only metal holding up relatively well in June is gold…

While the yellow metal is down the past two days, it still has solid technical support at $1,170. However, should gold fall below this level, there’s a very good possibility of additional selling pressure taking it down to $1,150 an ounce or lower.

Unfortunately, there’s little to get excited about in the precious metals complex right now. While these metals are undoubtedly cheap compared to a few years ago, there’s little fundamental data to suggest a large-scale rally in the metals is imminent.

 

Softs

Much like the precious metals space, trading in the softs complex has leaned in favor of the bears the past few weeks.

For example, coffee is still struggling to stay above $1.30 a pound despite supply/demand fundamentals supporting higher prices. Meanwhile, sugar is in a strong bearish trend since hitting $0.14 a pound in mid-May. The commodity is sinking under $0.12 in today’s session.

The only softs holding their ground are cotton and cocoa…

Cotton is trading in a sideways range at $0.64 a pound while cocoa is in a strong uptrend, nearing $3,300 a ton.  It’s tempting to get long the cocoa market due to its bullish momentum, but it’s likely the ongoing rally has already experienced the lion’s share of it gains.   After all, the commodity is trading near the highs set during the Ebola crisis of September 2014.

 

Livestock

The feeder cattle market has slowed its gains in recent days…

As you may remember, feeders made a strong bullish move starting in March. However, it’s likely this market needs to consolidate its gains of the past few months before advancing higher.

The commodity seems to be stalling at the $2.25 a pound area the past week as investors lock in some well-deserved profits.

But remember, feeder cattle supply/demand fundamentals are strongly in favor of the bulls, especially with the high-demand summer grilling season just getting started!

 

Category: Commodity Trading