Fear and Opportunity

Panic driven moves in the market often set up nicely profitable trading opportunities. This is simply an exaggerated mean reversion strategy, which is a proven way to win in the markets. We have seen yet another panic in recent weeks, with a number of asset groups pushed far from their short and longer term mean price trends.

One of the most dramatic, and therefore opportunistic moves that I see setting up is in the commodities. Gold has been the beneficiary of panic buying, and oil conversely has sold off hard. Gold is extended well beyond both its 200 day and 200 week SMAs, while crude oil has fallen below both levels. The setup, then, will be to go short gold and long oil for the mean reversion trade.

Two caveats: as with everything in the markets, timing is of paramount importance; being right but too early or late is still being wrong. The other is your choice of commodity trading vehicles. Many smaller investors use ETFs and ETNs for this, rather than trading futures, because it is simpler and transaction costs tend to be lower. DO NOT trade exchange traded products which are based on derivatives (futures and options) unless you understand the effects of backwardation and contango on the share prices. These contract roll effects can cause the exchange traded products not to track the underlying commodity very well at all.

A more conservative way to approach this mean reversion trade would be to stay away from the gold side altogether, and go long energy company stocks once they have found price support. For long term portfolio holdings, adding to positions in the energy majors when they “go on sale” is a sound strategy with an element of inflation hedge.


2 thoughts on “Fear and Opportunity

  1. Just want to say what a great blog you got here!
    I’ve been around for quite a lot of time, but finally decided to show my appreciation of your work!

    Thumbs up, and keep it going!

    Christian, iwspo.net

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