Did the markets just go ice-cold? My YETI Tumbler says yes, but my overpriced khaki cooler says it’s temporary. In my view, both are right. I’m certainly not in the crowd that thinks this downtrend is permanent, but it may just be a winter-break coming early. And I for one am looking at opportunities in high-demand commodities
So Jack, what are the best commodities to invest in right now?
Glad you asked. It all comes down to climate. Politics aside (as always), corn is more of a South America story and perfectly opens up the narrative of prices going higher (and maybe much higher). In some parts of the world, there are actually freezing temperatures where there never has been (finally the title of this blog comes into play).
Natural gas is tightly correlated to a late winter or an early winter. If we have a severe nation-wide “early winter”, then not only am I going to make sure I have enough generators (because I’m in Texas), I’m also going to make sure I’m long anything energy. Quite frankly one of my favorite things to do is entertain “low-probability” trades. Because in this market, buying the dip looks like a low-probability play.
It doesn’t sound great, but hear me out. In the past, natural gas futures have popped in a major way. If you encompass all of the external variables that affect natural gas (supply and demand), it’s painfully easy to come up with a bullish scenario.
If energy starts to take off, I’m expecting a parabolic move, a “rogue-wave” if you will (hopefully you aren’t selling natural gas calls like our buddy Cordier).
Short-term priorities to keep us off the ice
Shifting away, for a second, from corn and natural gas, let’s talk about some of the immediate things I’m focusing on so we don’t find ourselves sliding across black ice into October.
Let’s pay attention to the dollar. Did you see the September 29th move? Typically, if I want to be long the dollar I’ll just short equities, but that end-of-day move was substantial. Not only that, the market essentially gave away everything it had in a substantial way right at the very end of the market today.
Seeing how quarterly expiration is September 30th, and seeing how the market typically gets uglier around this time, this isn’t a catalyst for me to be deploying any longs.
Currently, I’m holding onto my QQQ puts into November. This allows me to continue benefiting from, what to me, looks like more weakness. In the meantime, I’ll focus on deploying capital to the long side once the indices form more of a base. Granted, you already know this could mean much lower from where we are now. Now let’s talk about FANG (FB, AMZN, NFLX, GOOG).
It’s actually a surprisingly short conversation. That is, if FANG goes, so goes the market. And generally, if you have the 10-years moving at that kind of velocity, that’s typically not super bullish for equities either. To me the “big picture” is all about the dollar and the weakening or “distribution out of tech”.
Deploying My Commodity Trades
Once my short-term house is in order, I’m back to preparing for winter. How will we deploy the commodity trades?
First, as I mentioned, corn has been affected, and so it’s very straightforward. I’m entertaining aggressive longs on corn futures.
Second, I like selling put-credit-spreads on UNG or any of the oil/gas stocks. Some of you newer traders might be looking at BIOL…but enter at your own risk. Like I say, I’m never at all trying to bet the farm.
Then, I think at this present moment in time, I want to be aggressive into next year – long natural gas. I’m in the crowd of “energy is stupid cheap, and at some point, the man’s gonna get smart on us”. So can we profit from it? You bet, as traders we make money on the way up and on the way down. So in the next week or two, if you follow me in the rooms, I’ll have a focus on these ideas and other energy stocks we can try to be early to.
Volatility is back for commodities in 2021
Remember, when the market starts to trend in a different way, you can be suckered into the automatic way of thinking that a bull market and a bear market are the same thing, “it’s just a different direction, Jack”. That’s completely wrong.
They are two different animals and they trade much differently. This type of moment in time is the worst time for emotional traders or traders that haven’t dealt with either past-traumas, or general life issues in a healthy and productive way. I always encourage traders to take a break and stay on the sidelines if you feel lost.
The volatility is back. I spoke on this in detail during my Micro-futures class. While this is good, it’s also tricky. Simply to the point, you have to make the switch with the market.
In other words, yes you may catch an awesome move down but you need to understand that the move higher can be a wicked and disgusting short covering rally. So, again don’t be greedy. For now, it seems over simplified, but we just want to keep in mind that this market has been resilient.
There’ll be a lot more volatility to be expected, but, let’s just try to get through October and really keep an eye on natural gas and corn. Those should not only be profitable opportunities, but super fun especially if we can be early to the crowd to either shorting the market, or deploying an army of longs in high-demand commodities.
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