CEA Portfolio Update – March 2015

| March 24, 2015

WTI Crude: More Downside Coming?

As you know, I sent out an email on March 10th, alerting you to the buying opportunity in the US Short Oil Fund (DNO).

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

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No doubt about it folks, it was another ugly month for WTI crude…

After setting a high of $52.40 a barrel on March 5th, the commodity quickly sank to $42.40 on March 17th– a 19% downturn.

Of course, this is great news since we initiated a position in the US Short Oil Fund (DNO) on March 10th.

As you know, DNO surged to an intraday high of $67.19 on March 18th– a solid 14% gain from our $58.94 buy price.

Not bad for a few days work!

But here’s the question we’re faced with…

Do we lock in profits on this trade or hold for continued downside in WTI?

Let’s address the situation from a fundamental and technical standpoint…

First of all, nothing has changed from a fundamental perspective since we initiated the trade earlier this month.  US supply is still greatly outweighing demand.

In fact, last week’s EIA oil inventory report revealed another remarkable build in US crude supplies.  For the week of March 13th, inventories jumped by 9.6 million barrels to 458.8 million barrels.

That’s yet another 80-year high in US crude supplies!

But take a look at this…

Crude bears are turning their attention towards a developing situation in the Middle East as the catalyst for further downside.

According to various sources, the US is close to reaching a deal with Iran over its controversial nuclear program.

As you may know, the two countries have been negotiating for years.  The US wants Iran to give up its nuclear ambitions due to the political instability it would cause should the country develop a nuclear weapon.

Here’s the key point…

If a deal is reached, the US may drop Iranian oil export sanctions.  

That means an additional 1.2 million barrels of oil may hit the global marketplace within 3-6 months!

There’s really no question what an abrupt supply increase of that nature would do to the already oversupplied global oil market- prices would very likely come under additional bearish pressure.

From a fundamental perspective, it certainly appears more downside is in store for the oil market.

What about the technical perspective?

Let’s look at a chart…

WTI Crude

As you can see from the red line, crude is still stuck in an aggressive downtrend.  Until WTI can rally firmly above the red line in the chart above, bears will remain in control from a technical standpoint.

With all this information in mind, what do we do with our position in DNO?

While there’s clearly still potential for lower prices in WTI, we have to be careful.  With crude trading at 6-year lows, the slightest bit of unexpected bullish news could bring buyers back into the market in force.

Even though the above scenario is unlikely, it’s still in the realm of possibility.

That’s why I suggest we move our stops to breakeven at $58.94 on DNO.

Doing so will allow us to capitalize on further downside in the commodity, while erasing the potential for losses.

Now let me be clear…

With this trade plan, there’s a distinct possibility we close this trade for no gain.  That’s why you may want to sell a portion of your position in DNO right now.  This way you’ll collect some nice profits in this trade no matter what.

And if WTI crude breaks to new lows soon, you can close the remaining portion of DNO at even higher prices. 

Speaking of profit taking… 

You’re free to take profits on any of the trades in the Commodity ETF Alert at any time.  The profit targets I provide in the trade alerts each month are simply meant as an idea of the potential upside in each trade.

Ultimately, profit taking is your responsibility.  If you’re happy with the gains in any particular trade, take it to the bank!

 

Commodity Review

Commodity Ticker Current Value Last Month Change
Energy JJE $9.43 $10.09 -6.5%
Grains JJG $36.36 $35.81 +1.5%
Industrial Metals JJM $27.11 $25.28 +7.2%
Precious Metals JJP $56.77 $56.95 -0.3%
Softs JJS $33.77 $37.29 -9.4%
Livestock COW $26.75 $26.30 +1.7%
ALL COMMODITIES DJP $28.52 $28.88 -1.2%
As of 03/23/15

 

Energy Commodities

The shoulder season is upon us…

What the heck am I talking about?

The shoulder season is a term used by natural gas investors to describe the low demand months in the Spring and Fall.  During the Spring shoulder season, warming US temperatures send natural gas demand into the gutter.

As a result, natural gas inventories start getting rebuilt as weekly storage withdrawals turn into injections.

What’s the shoulder season mean for prices?

One would think the low demand season would be bearish for prices.  But believe it or not, if you look at a 20-year price study, natural gas tends to rally from mid-March through June.

Despite this strong seasonal pattern, it’s unlikely bulls return to natural gas in force this Spring.  The market is simply too well supplied.

What about our position in the Energy Select Sector SPDR (XLE)?

Due to the downturn in oil this month, XLE fell to $74 a share.  As you may remember from last month’s update, I recommended you hold the energy producers ETF through any looming weakness.

What do we do now?

With XLE currently trading in the $76 area, I recommend we move this trade to a HOLD.

Now don’t get me wrong, I still believe there’s enormous potential for energy stocks heading into mid- and late-2015.  However, given the bearish uncertainty in WTI crude, we’ll likely have to be very patient to achieve the gains we’re looking for.

Remember, our worst-case scenario in this trade is XLE dropping below $71.75.  If it does, we’ll have to close this trade to conserve capital.

For now, just keep holding XLE for the eventual return of bulls to the energy sector.

 

Grain Commodities

The Spring planting season is upon us!

With ground starting to thaw across the central US corn belt, farmers are getting their equipment ready for the planting rush.  Meanwhile investors are focusing their attention on the weekly crop progress reports, which start hitting the newswires in April.

But that’s not all…

The USDA’s monthly World Agriculture Supply/Demand Estimates (WASDE) report will start getting more attention from investors as well.  The next report is scheduled for April 9th.

With all this in mind, our position in the Teucrium Commodity Trust Corn Fund (CORN) is holding up nicely.  In fact, the corn ETF rallied to $25.61 in recent trading.  That’s still well above our buy price of $23.70.

Let’s keep holding CORN for the potential of higher prices this summer!

 

Industrial Metals 

So much for our idea of picking up copper on the cheap in coming months!  The red metal jumped from $2.60 to $2.90 a pound in recent trading- a quick 11% jump.

What’s going on?

The sudden rally comes as a bit of a surprise since Chinese economic data is still coming in decidedly weak.

But as you may remember, I laid out a longer-term bullish thesis for copper in last month’s update.  It looks as though investors are already starting to factor in looming supply issues later this year!

 

Precious Metals

After a very disappointing performance in February and early March, buyers rushed back into precious metals in recent trading.  Gold has rallied from $1,150 to $1,188 an ounce the past few days while silver has jumped from $15.50 to $17.

Why the sudden uptick in bullish interest?

The US Federal Reserve surprised investors last Wednesday when they announced upcoming interest rate hikes would be very conservative.  In other words, while the Fed is ready to move interest rates up from 0%, any increases will be slow and dependent upon incoming economic data.

No doubt about it, the Fed’s tone was undeniably dovish last week.

It will be interesting to see if the current rally in precious metals has legs.

What’s the story with our Market Vectors Gold Miners (GDX)?

Unfortunately GDX took a nasty downturn in early March.  The gold miner ETF sank to $18 a share before bulls returned to push it back up to the $19 area.

Now as you may remember, we moved our stop loss order on GDX up to $19.90 in the January 2015 monthly update.  As a result, this trade is now closed due the fact the gold miner ETF fell below this important level in recent trading.

Yes, it’s disappointing.  We had solid gains in GDX at one point.  But you have to remember that risk control is the most important aspect of trading.  It’s always better to take a small loss like we did in GDX than a large loss that depletes the capital in your account.

 

Softs

One thing’s for certain, it has been one heck of a roller coaster ride in soft commodities the past few months.

Take cocoa for example.  The commodity plunged from $3,000 a ton down to $2,700 in January.  But in February, cocoa bulls returned, pushing the asset right back up to $3,000.

But bears weren’t to be outdone.  Come March, cocoa once again dropped precipitously to $2,700!

You can find similar, wild price action across the softs landscape in coffee, orange juice, cotton, and sugar.

I’m on the lookout for opportunity in softs but just haven’t seen what we’re looking for yet.  When I do, you’ll be the first to know!

 

Livestock

The early year weakness in live and feeder cattle has dissipated.  In fact, both cattle contracts are rising back towards the all-time highs set in late 2014.

While it’s unlikely we see cattle prices break to new all-time highs this year, there’s a very real possibility these markets stay strong through the summer months.  Of course, that’s when meat demand is the strongest due to the outdoor grilling season.

 

Category: Commodity Trading

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