Investors aren’t limited to only investing in the S&P 500 and the Dow Jones Industrial Average. Every week we share the market trends we are following. We are interested in whether the trends in those markets are continuing or if they are experiencing a temporary or complete reversal.
When we identify trends, we are only concerned about the price data and what it says about any given market. We don’t need to know why a trend has formed to invest, but our human nature wants to understand what is driving them. Each week we try to offer some perspective on what we think the most substantial moves are and what critical drivers are behind them. Here we look at what is going in our globally diversified, non-correlated Crystal Bay Ubitrend strategy.
Last week’s continuing trends:
- Natural Gas
- Orange Juice
- UK Gilts
- Oats
- Hard Red Winter Wheat
Last week’s reversing trends:
- European Rapeseed
- German and Japanese Government Bonds
- Nasdaq Index
- Coffee
What we are taking note of:
Natural gas is in an unprecedented situation. Natural gas prices fell to levels not seen in 25 years. The shale revolution in the United States unlocked huge new reserves of oil and gas and drove down natural gas prices relentlessly in the past 10 years.
Much of the natural gas produced from shale comes mixed with liquids such as ethane and butane that are valuable on their own. When oil prices increase, the value of these natural gas liquids (NGLs) increases as well and marginal gas producers are willing to sell natural gas below cost because the revenue from NGLs makes up for the losses.
Since the bottom in April, we have seen a recovery in oil prices that has encouraged natural gas companies to ramp up their NGL production. Excess natural gas that is the byproduct of that decision is now flooding the market. Natural gas is difficult to transport and cannot be easily exported out of the US. It is also hard to store. Domestic demand is still weak due to the economic recession. It is no wonder that prices are collapsing; nobody knows how much further they can fall. Trend followers, however, do not need to summon unusual powers of prophecy to trade natural gas; their algorithms will ride the decline all the way until there is evidence of bottoming out.
How are we heading into next week?
The Crystal Bay Ubitrend strategy added to its metal positions by going long in Copper. In the recent past, copper consumption has been dominated by Chinese domestic demand, both for construction and infrastructure projects. Copper sold off after China started to shut down its economy in response to Covid; the effectiveness of Chinese response has manifested itself in revived industrial production and now in growing demand for raw materials including Copper.
The Crystal Bay Ubitrend has its biggest exposures in the rates and agriculture sectors, followed by metals. Energy, equities, and currencies have one position each.