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This Week’s Trading Outlook & Guide
Portfolio Reaches New 52-Week High On Natural Gas Weakness & Oil Volatility; Natural Gas Remains Overvalued Throughout The Forecast Period While Crude Oil Is Fairly-Valued Near-Term & Undervalued Long-Term; I Continue To Raise Cash
Tuesday, May 30, 2017
Natural gas finished with a low-volatility 0.6% weekly loss while crude oil had a volatile week including a 5% Thursday loss to finish the week with a 1.7% decline. On the week, my oil & natural gas portfolio finished with a small 0.6% gain after rising as much as 1.7% intraweek, bolstered by natural gas weakness and blunted by crude oil weakness. The small gain stretched May’s profit to 10.2%.
As of Friday’s close, natural gas is overvalued by nearly 8% based on current inventories alone and by 4.6% versus its long-term 8-month Average Fair Price. Crude oil, on the other hand, is trading at a small 2.7% overvaluation based on current inventories which, thanks to an ongoing tight market, flips to a 17% undervaluation versus its 8-month average Fair Price.
For this reason, a short position in the 3x ETF UGAZ remains my largest holding comprising 21% of the portfolio. With natural gas approaching its long-term Fair Price, my strategy this week will be to continue taking profits on further weakness in natural gas with a goal to be out of the sector entirely should the July 2017 contract drop to around $3.15/MMBTU. I will then await a divergence from its Fair Price before re-instituting a natural gas long or short position. Should natural gas instead rebound, I will look to add to my position only should the overvaluation versus the 8-month average Fair Price exceed 8%. With generally season demand expected into mid-June, I expect continued rangebound trading with below-average volatility.
Based on Fair Price analysis, I remain long crude oil via a short position in the 3x Inverse ETF DWT. This position comprises 15% of the portfolio. While this undervaluation and tight market form the basis of the trade, this sector is sending mixed signals with an slight loosening in recent weeks, a continued rise in domestic production, and the strong negative response to Thursday’s OPEC announcement, make the trade less compelling. I have no plans to add to this position and will continue to take profits should oil rebound further this week. Both of these positions, particularly oil last week, continue to benefit from leverage-induced decay which is why I continue to hold short positions in the opposing ETF rather than going long.
I continue to hold small long stakes in CHK, BTU, and LNG. LNG continues to be an outformer with gains in this position exceeding 17% in the 5 months or so since I initiated the position. I have no plans to take profits on the position at this time. CHK and my new short position in BTU hold near breakeven.
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