October 16th, 2012

KOL and UNG: the First Chapter

I’m not breaking any new headlines here but the Fed has flooded the economy with a huge amount of liquidity.  To this point about the only thing I focused on with regard to all that money sloshing around is to wonder when it might come in to the stock market.  Consequently, I missed the surprising new boom that’s emerged in housing and most related industries like lumber,construction equipment and tools and home related retail.

But sooner or later all that newly created money should begin to show up in commodity prices (other than precious metals), inflation statistics and, finally, in interest rates.  We may have gotten a peek at that future this morning when the government reported that industrial production rose 0.4% in September while capacity utilization inched ahead from 78.0% to 78.3% and copper rose 0.5% on the commodity exchange.  It may be time to take a look at a couple commodity ETFs.

  • UNG (Natural Gas): I swore off of natural gas having been burned by it (no pun intended) several times over the past few years as I bought mistakenly believing that the commodity just couldn’t drop any further in price only to have been proven wrong.  Perhaps it might be one of the instances again:What a huge destruction of value!  If you had put $1000 into UNG when it first became available and held on for the duration, you would have been left with a measly $54.80.  There’s not much hope in recouping all that money any time soon but, if you want to put $1000 in UNG today, you could have a fairly good chance of perhaps doubling it.  For the first time in many years, UNG is in the process of forming a reversal bottom pattern.  The 50-dma has crossed above both the 100- and 200-dma’s and the 100-dma has also crossed above the 200-dma.  Volume has picked up significantly due to many bottom fishers who are now betting on that bottom taking place.  There still are many skeptics out there so if a reversal is truly in the making then it will probably go through many stages and stretch out for years.  Along the way, there will be several constructive trading opportunities …. a long-term buy-and-hold approach could be frustrating.
  • KOL (coal): Coal is the bad boy of the energy complex but, with the possibility of a Romney victory, may gain some new found respect in the effort to become energy independent.Like the case of UNG, KOL is in the early phases of a clear-cut reversal pattern.  The upside opportunities may not be as significant as UNG (because the previous decline wasn’t as severe) but, as a more mature industry, they may be more certain.

Of course,one can play the natural gas and coal producers instead of the ETFs and there always are the precious metals (GLD, SLV, GDX) and their producers.  Clearly, this is a long-term unfolding story that we’ll continue to follow.

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