fbpx

Natural gas prices are soaring. Due to supply constraints and the beginning of colder weather in Europe, prices for the commodity are scoring. Although it is not as clean as solar, it is less harmful to the environment than coal or oil.

Burning natural gas for energy results in fewer emissions of nearly all types of air pollutants and carbon dioxide (CO2) than burning coal or petroleum products to produce an equal amount of energy.

The entire sector is running hot, with money flowing into large caps giants and small-cap minnows alike. Today I will run through some stocks in the sector that have already run and are still going and some new names that are laggards that could potentially join the run in the sector.

When a sector runs, it usually goes like this. First, the large-cap companies see buying interest. These are the premium companies that are best in class. Then the medium cap companies begin to move in sympathy.

They are not as good as the primo companies which lead the run but are smaller companies that benefit from the money flow into the sector. Finally, speculative money begins to flow into the small-cap sector.

These stocks may be rubbish companies that might not have great prospects but benefit from being related to the sector. Sometimes they are cash-burning businesses that can become turnaround stories due to tremendous profit increases due to rising prices in the commodity they are involved in.

Let’s take a look at some stocks in the booming sector below, as well as my pick for the next possible runner.

Gazprom (GAZP) is the world’s largest natural gas company and is listed on The Russian Stock Exchange with ADR’s in London under the symbol OGZD. It is up more than 120% since November 2020 and has a market capitalization of $140 billion.

It is making 52-week highs daily and approaching all-time highs not seen since before the 2008 global financial crisis.

Daily chat of OGZD the Gazprom ADR trading on the London Stock Exchange

Camber Energy, Inc. (CEI) is an independent oil and natural gas company engaged in the acquisition, development, and sale of crude oil, natural gas, and natural gas liquids (NGL) in the Cline shale and upper Wolfberry shale in Glasscock County, Texas.

As of March 31, 2020, its total estimated proved reserves were 133,442 million barrels of oil equivalent comprising 54,850 barrels of crude oil reserves, 43,955 barrels of NGL reserves, and 207,823 million cubic feet of natural gas reserves.

The stock is up more than 500% since August this year. CEI has a major resistance level at $3, but due to the number of people shorting this every day looking for a pullback, there is no telling how high this stock can go.

CEI has moved from under 50cents in August to $2.66 on Monday 27th of September

U.S. Energy Corp., (USEG) an independent energy company, focuses on the acquisition, exploration, and development of oil and natural gas properties in the United States. It holds interests in various oil and gas properties in the Williston Basin in North Dakota, the Permian Basin in New Mexico, the Powder River Basin in Wyoming, and in the Gulf Coast of Texas.

As of December 31, 2020, the company had an estimated proved reserves of 1,255,236 barrel of oil equivalent; and 134 gross producing wells. U.S. Energy Corp. was founded in 1966 and is based in Houston, Texas.

US Energy Corp (USEG) is a small-cap that saw some buying interest last week in sympathy with CEI. It exploded today on volume making a 10% move in one day. This is one to keep on your radar when trading this sector.

Daily chart of USEG

Naked Brands Group (NAKD) is a former retailer of women’s lingerie. It was a cash-burning business on the road to bankruptcy constantly raising money to continue its operations. On Friday, September 24 in a shareholder letter, they announced they were getting into the cleantech industry, here is an extract:

“an expanded balance sheet with a net cash position of $270 million USD for Naked Brand Group.

I am happy to report that after extensive searching and due diligence, we believe we have found a disruptive opportunity in the clean technology sector. Due diligence on both sides is progressing, and we believe the business combination will reward our patient shareholders.”

Here is the Daily Chart

NAKD daily chart

The stock closed up 10% on Friday. As Natural Gas futures make 7-year highs today it is up 17% intraday Monday as I write this. We could see this stock trading $1+ sometime this week, it is currently trading at 80cents.

Finally, here is my pick as the next stock in the Natural Gas sector that could explode. I sent it out as part of my watchlist on Friday to subscribers of Jeff’s Family Portfolio BEFORE it broke out. The stock is called Clean Energy Fuels Corp (CLNE). It is up 12% on the day as I write this breaking out on significant volume. Here was my note to subscribers:

My Watchlist

Clean Energy Fuels Corp. (CLNE)

Clean Energy Fuels Corp. provides natural gas as an alternative fuel for vehicle fleets and related fueling solutions. CLNE has been a stock I have been watching. The stock has yet to cross the 13/30 moving average nor the 200 hourly.

60minute Chart of CLNE on Friday BEFORE the breakout

My first target on CLNE is $10.50 where I would take off at least half of any position, the stock is currently trading at $9.16, and I would put stops below the breakout point of $8.20. It would be prudent to swing some of this position. With Natural Gas making 7-year highs there is no reason CLNE cannot break 52-week highs of $20 in the coming days/weeks if things get wild.

Bottom Line

When a sector gets hot due to changing fundamentals, we see money flow into various stocks in the particular industry. Usually, the best-in-class large caps run first, then the medium-sized companies, and finally, we see rotation into speculative small caps stocks.

This is exactly what we are seeing in the Natural Gas sector as futures make seven-year highs. The small-cap stocks in this sector are lighting up this week, and there is sure to be plenty of trading action in the days to come.

I will be keeping a close eye on all the stocks in this sector, with particular attention to CLNE, my pick from Friday, which is getting some interest today as it breaks out from its base.

Author: Jeff Bishop

One of the best traders anywhere, over the past 20 years Jeff’s made multi-millions trading stocks, ETFs, and options. He is renowned as an incredible trader with a deep insight and a sensitive pulse on the markets and the economy. Jeff Bishop is CEO and Co-Founder of RagingBull.com.

Even greater than his prowess as a trader is his skill and passion in teaching others how to trade and rake in profits while managing risk.

Total Alpha daily updates focus heavily on intra-day charts that view price action in relation to the 13- and 30-hour moving averages.

Intra-day charts are highly depended on by day traders but underutilized by swing and longer-term position traders that hold positions beyond one day.

No matter your chosen form of trading, you should have at least one intra-day chart included as part of your trading screen setup, in order to better assist you in your efforts to find the best entry and exit points possible.

Today, I am going to show you the very noticeable intra-day volatility pattern that occurs across the major cash indices (i.e., those markets that trade from 9:30 am to 4:00 pm EST and settle in cash), and I’ll explain how this pattern can either work for or against you in your trading.

What causes the US equity market’s intra-day volatility pattern?

Market participants, both carbon-based (i.e., humans) and silicon-based (i.e., computers), are the cause of periodic movement during the day, and an increase in both has caused liquidity to grow across nearly all markets.

Interestingly, though, this has not altered the intraday volatility patterns.

The classic pattern in the benchmark S&P 500 cash index (SPX), which trades from 9:30 am to 4:00 pm EST, M – F, shows the greatest volume near the open, the next highest volume near the close, and the lowest volume at mid-day.

This pattern manifests as a U-shape in popular volatility studies like the Average True Range (ATR) indicator, which is shown in the bottom panel of the 1-minute chart of the S&P 500 cash index directly below.

Figure 1

There are a number of reasons for this normal pattern of trading.

The opening bell

Consider that many investors evaluate their positions and study market reports in the evenings and then place their orders in the morning.

Or, that in Europe, where business begins six hours earlier, economic reports are released before the start of US trading and can affect the early market direction.

These are just a couple of examples of the things that can influence the increased volatility at the start of each trading day.

It’s important to understand that the cash market, which trades from 9:30 am to 4:00 pm EST, will either gap up or down to catch up to whatever movement occurred during the overnight futures market action.

After a short delay, as the first burst of activity slows, many computer algorithms are programmed to sell a strong open and buy a weak one.

Once the opening orders have been executed, volatility then declines as the order flow that has accumulated from decisions made since the last close have dried up.

Scalpers, who are traders aiming to make a rapid trade with the goal of profiting off of a stock’s small movements, are active during the opening minutes but frequently ease up on trading in the afternoon because of the drop-off in volatility.

This can often lead to a temporary price reversal of the trend that had developed during the morning session.

The closing bell

The close of the day is a common time for trading because many investors believe that the closing price best represents the correct value.

It is also the time that many institutions are putting money to work, to take advantage of the increased volume that occurs near session’s end.

Large funds and managed accounts have a specific method for entering the market, such as using close-only orders.

For these large players, trading when volume is heavy allows them to take advantage of VWAP orders (volume-weighted average price) where partial orders are automatically fed into the market based on an algorithm that balances time intervals and volume.

Conclusion

Over time, you’ll get a better feel for how the market tends to react at certain times of the day.

Until you get a hang of things, it’s probably a good idea to avoid entering orders for at least the first 60 minutes of the day, as the extreme volatility during that window can be hard to navigate.

Once the market has been open for an hour and starts to move away from the opening price, the odds increase that the early high or low will be the daily high or low.

Then, if that level is broken, the close becomes the next likely time for a high or low.

On the somewhat rarer occasions when a new high or low is made during the mid-day session, this could be the basis for an intraday breakout strategy for day traders.

Sure, there are certain options strategies, such as selling 0-DTE (zero days to expiration) bull put spreads or bear call spreads that can benefit from being entered during peak opening bell volatility, but these are strategies that take a long time to master and definitely deserve a detailed discussion outside of this one.

Author: Jeff Bishop

One of the best traders anywhere, over the past 20 years Jeff’s made multi-millions trading stocks, ETFs, and options. He is renowned as an incredible trader with a deep insight and a sensitive pulse on the markets and the economy. Jeff Bishop is CEO and Co-Founder of RagingBull.com.

Even greater than his prowess as a trader is his skill and passion in teaching others how to trade and rake in profits while managing risk.

In the wake of the Federal Open Market Committee’s (FOMC) widely anticipated meeting this past week, the yield on the benchmark 10-Yr Treasury contract has begun to break out of a near-term base.

Though it is not a commonly covered topic here, I like to highlight what’s going on in the bond market when the potential for a large move in rates is elevated, as this could cause a major shift in leadership across numerous equity sectors.

When commenting on these prior articles, some of our readers have expressed interest in learning more about the basics of the bond market.

Therefore, today’s discussion will focus on bond market basics, as well as the implications that large moves in the bond market can have on many of the sectors that we not only love to trade, but often do not give much consideration to.

Bond Market Basics

Before we begin, I should mention that some aspects of the bond market, particularly some of the math involved, can be incredibly complex.

So, for today’s discussion we’re going to stick to the very basics of how bonds work, how they are different from stocks, and some of the key market-related implications.

What is a bond?

A bond is a type of investment that represents a loan between a borrower and a lender.

For today’s discussion, you are the lender (known as the investor or creditor) and the borrower is the US federal government (known as the issuer).

The issuer promises to make regular interest payments to the investor at a specified rate (the yield) on the amount it has borrowed (the face amount) until a specified date (the maturity date).

In today’s example, when discussing the benchmark 10-Yr Treasury Note, we’re talking about a loan of 10 years in duration.

Other popular loan durations are 30 years, 5 years and 2 years.

Once the bond matures, the interest payments stop and the issuer is required to repay the face amount of the principal to the investor.

Because the interest payments are made generally at set periods, bonds are often called fixed-income securities.

How are bonds different from stocks?

Bonds are known as debt investments, while stocks are equity investments, since the purchase of a stock’s shares makes that investor a part owner of the corporation.

Although corporations can also issue bonds (i.e.,debt investments), bonds, in general, do not provide an opportunity to share in the profits of the corporation.

Stockholders, on the other hand, are entitled to receive a portion of the profits and may also be given voting rights.

Bondholders earn interest while stockholders typically receive dividends.

Both may experience capital gains or capital losses if the price at which they sell their holdings is, respectively, higher or lower than the price at which they bought them.

Because bondholders are creditors of a debt agreement rather than part owners of a corporation, if a corporation goes bankrupt, bondholders have a higher claim on assets than stockholders.

While this results in added security to the bond investor, it does not completely eliminate risk.

How should price movement across the US Treasury market be translated?

From a market perspective, when the price of US Treasury contracts like the widely discussed 10-Yr Treasury contract rises, the yield on that contract falls.

Conversely, when the yield on that contact rises, as it has been in recent days, the price of that contract falls.

This is shown on Figure 1 below, which is a weekly chart of the 10-Year Treasury yield vs. the 10-Year Treasury contract price.

Figure 1

Interest rates are starting to rise again

The recent rise is due largely to a combination of inflationary pressures in the market and the Federal Reserve’s recent discussions about moving closer to tapering its bond purchase program, which had been put in place to help keep the yields on these Treasury contracts low to help promote borrowing during post-COVID 19 economic weakness.

While inflationary market rotation is good for some sectors, and we’ll discuss those in a moment, it is not friendly to the large tech companies and other popular growth companies that so many of us have loved to trade in recent years.

Perhaps two of the most important drivers of intermarket cycles are the US dollar and interest rates.

Fluctuations in both can have either beneficial or detrimental effects on the earnings power of a wide swath of companies.

For example, a strong dollar can hurt large multinational US-based companies because it raises the cost of products provided by these companies, thereby making them relatively unattractive vs. those of foreign competitors whose goods have fallen in price as a result of their currencies being depressed by the rising dollar.

Another example, and one that is at the core of today’s discussion, has to do with fluctuations in interest rates.

So, why is it a potential concern that the yield on the benchmark US 10-year Treasury contract has been on the rise recently?

Well, the primary concern is if inflationary pressures are indeed set to accelerate, it would cause interest rates to rise rather sharply.

As Figure 2 reveals, large fluctuations in interest rates have been the key driver behind periods of leadership and underperformance by two important sectors, tech and financials.

In addition, as the bottom panel shows, interest rate cycles carry a lot of weight in the relationship between smallcap and largecap growth stocks.

Figure 2

There are other sectors that have been affected by these gyrations; however, these are the two sectors that we’ll be focusing on today.

How do interest rates affect stocks in these sectors?

Large growth stocks like those that influence the movement of NASDAQ -100 ETF (QQQ) are valued based on future discounted cash flows.

Therefore, if stocks are valued based on future discounted cash flows, and the discount rate is zero, then it doesn’t matter if investors see that money one month from now or 10 years from now.

Of course, interest rates are still just one, albeit an important, part of a complicated equation. An equation that uses more than just hypothetical future cash flows and today’s discount rate.

When it comes to financial stocks, the explanation is perhaps easier to understand.

In layman’s terms, when interest rates are higher, banks make more money by taking advantage of the difference between the interest banks pay to customers and the interest the bank can earn by investing.

How can traders monitor this rotation?

To monitor these developments on your own, it is always good practice to chart the relative strength ratio between a tech-heavy index like QQQ or XLK (S&P 500 Technology sector) vs. the benchmark S&P 500.

To do this in Tradingview, enter the first ticker (in this case QQQ) then select the division sign (see Figure 3 below), then enter the ticker for the benchmark (in this case SPY for the S&P 500).

Figure 3

To do this in Stockcharts.com, enter the first ticker (in this case QQQ) then type a colon (see Figure 4 below), then enter the ticker for the benchmark (in this case SPY for the S&P 500).

Figure 4

Conclusion

When markets are witnessing a trend transition, it is a process that can take several days-to-weeks to play out.

Right now, as this transition process in interest rates continues to unfold, traders should avoid overweighting large, growth companies like the big tech companies so many of us have loved trading over the years.

Failure to heed this warning could lead to missed opportunities elsewhere as positions stagnate vs. the sectors that are slated to benefit from this rotation over time.

As we discussed in this commentary, those sectors are small cap companies and financials.

Author: Jeff Bishop

One of the best traders anywhere, over the past 20 years Jeff’s made multi-millions trading stocks, ETFs, and options. He is renowned as an incredible trader with a deep insight and a sensitive pulse on the markets and the economy. Jeff Bishop is CEO and Co-Founder of RagingBull.com.

Even greater than his prowess as a trader is his skill and passion in teaching others how to trade and rake in profits while managing risk.