Tuesday, April 12, 2016

The Crazy Oil Trade

Note: What is described below is highly speculative and not recommended for any sort of real money trade execution.

I believe there is a severe mispricing of many oil stocks that are now below/around a $1. The market is being too pessimistic as it once was in 2008. It is unlikely the entire group of mid/small cap oil companies will ALL go down under. Even if some do, or most, the following trade idea will likely still be profitable.

Looking back at the financial crisis of 2008, many prominent  large cap companies turned into penny stocks especially in the banking and automotive industry. Not all stocks survived. For example, General Motors ($GM) share holders eventually got wiped out. However, Ford ($F) recovered, giving exponential returns (eventually making new 10-year highs). Thus, a pair trade would of been extremely profitable (purchasing both stocks and holding simultaneously). Similarly, in the financial sector, Citigroup ($C) and Bank of America ($BAC) had an epic recovery eventually. 

The thesis of this trade is that the Market is being too pessimistic when it comes to these oil companies as a whole failing and the share holders getting wiped out completely. Thus, giving them no chance to profit once oil prices eventually stabilize.  In some of the worst cases within the last year, a few companies that have already restructured through bankruptcy were able to retain some equity to their shareholders (beware many got wiped out as well). Therefore it is not always game over when filling for bankruptcy (I do not recommend in this type of speculation, just stating a fact).

As per my thesis, I believe an incredibly profitable trade would be to purchase a basket of distressed oil stocks (the more stocks purchased the better in increasing your chances of holding some that will survive long term). Those that survive will likely give at least 10X in returns, with the expectation that these will be held for a very long time (possibly 5-10 years out).

Sunday, March 6, 2016

Where The Stock Market Is Heading in 2016-2017

In late November of 2015 I talked about the Bulls being in trouble when it came to the Market. It took around a month until the Market entered a violent correction that lasted a few months. During this correction the Market on corrected around 17-20% (Nasdaq, Dow, S&P 500).

After watching the Market continue to bounce since mid-February I have come to the conclusion that the Market may be starting a new uptrend (a pullback may be in order here first). 

I must admit I was actually expecting more of a correction (looking for the Nasdaq to make a new 52 week low). Part of my reasoning was because a lot of oil companies were heading towards bankruptcy this month, thus possibly triggering a negative domino effect throughout the world economy. However, in the last week a trend has emerged of successful debt restructure for a lot of oil companies. Therefore, buying them extra time.

Saturday, February 20, 2016

Don't Just Short It!

If you want to be a winning trader, never short because you think:
  1.  The stock is overvalued or
  2.  Because it went up too fast.
If you think a stock fits either 1 or 2, be patient, and wait until the market agrees with your point of view. Ideally, you would want to follow the stock and use technical analysis. When the the trend changes downward, then short it.

However, one could argue against this strategy (correctly), that the use of technical analysis isn't often accurate, especially the way it is taught in books. Just too many people using it, making it less reliable, and leaving you vulnerable to margin calls, or severe losses with put options.

Remember that stocks go up at a slow pace, but it takes a split second to plunge; that is why shorting is an art and timing is everything (unfortunately timing often is random as explained above).

Shorting during earnings is gambling; In the past years Amazon (AMZN) and Netflix (NFLX) are a good example of crazy upside actions. The market isn't rational; it does what it wants. Sometimes you get so caught up in the emotions of trading that you forget that no matter how right you think you are and no matter how over-valued you think the stock is, the market is boss. Remember that!