Here are the questions, and my responses for last weeks “Ask me Anything” prompter.
Natural gas and oil are flat yet stocks are down – why?
I had a couple of questions come in regarding the disconnect between nat gas pricing and the producers, and the disconnect between oil prices and the producers.
The charts below are correlation studies. That is, the bottom panel shows you how often the stocks are in sync with the commodity prices in these two cases. The closer that bottom panel sits to 1.0, the closer the performance between the two.
The WTI oil (red line) vs. the XOI oil producer ETF (black line) comparison is below. Oil pricing and producer performance are pretty much in sync most of the time. Two disconnects occurred in late 2014 and mid 2016—but the relationship has been predictable. It’s about 80% correlated- as you can see on that line.
The nat gas chart differs. Basically, correlation jumps up and down like a yo-yo. Nat gas (red line) is not always in sync with the producers, represented by the black line of FCG-US ETF (First trust nat gas ETF). So it shouldn’t be of too much surprise that your gas producer stocks don’t line up with the commodity.
How do I build a $50,000 portfolio?
If you are going to own stocks, you should consider holding in excess of 20 stocks most of the time. My blog here covers how to proportion your positions.
Read my books SmartBounce
And Sideways for some step by step guidelines on creating an investment strategy if you want to be hands-on.
Alternatively, you could trade index ETF’s with a smaller portfolio. Even following a seasonal discipline (sell in May and go away!) with a set amount of that position every year can perform very well. Let’s say you keep fully invested in your index ETF(s) for the winter then you reduce your exposure by some percentage every summer. You do this by selling some of the index ETF(s) and re-buying them in the fall. For more on that strategy, or to go deeper into sector rotation, I recommend Thackray’s Guides and his free newsletter, or read Don Vialoux work
To keep it really simple you could look at the Horizons Seasonal ETF (HAC-T) which Brook Thackray runs.
Should I short the market until the fall?
I assume you want to do this to hedge your risk. I covered this topic quite thoroughly in a blog about a year ago—and encourage you to read it. It will give you the upside and downside of shorting, or using other hedging techniques in your portfolio to offset risk. Here is the blog.
How to establish stop losses
I don’t use stop losses, but I do have an exit strategy. You can get a detailed trading strategy in my book Sideways mentioned above. But in a nutshell – if you are concerned about risk, I sell when the declining stock has met 3 criteria:
- If the stock or market has moved below support by about 3% or more—which can be determined by observation of 3 bounces at a given price in the past.
- If it has put in a lower low, and moved below the 200 day MA
- If it stays there for (depending on your time horizon) 3 bars–ie a minimum of 3 days. I use 3 weeks more often.
From there, I like to see if it will bounce if oversold, then I sell.
How to establish large positions in index ETF’s
Again—sorry for promoting the book so much, but Sideways has details on my buy and sell strategies. In a nutshell:
- If the market has been consolidating, buy on the breakout, or at the bottom of the trading range. You could do both (buy at the bottom of a range, then if it breaks out, buy more)
- If the market is in an uptrend, buy on pullbacks to the trendline. You can leg in a bit at a time if you wish—I don’t have a rule for how much per purchase.
Thanks for the questions- I will do other “Ask me anything” blogs in the future—back to my regular format later this week