Martin Kronicle

Talk about portfolio heat...

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When the markets are directionless, and the volatility per contract is high, you can expect to lose between 5 and 20% of your equity for what seems like no reason.

Take a look at the chart I built tonight and look at the “$ Volatility” per contract. It is off the charts. It’s not until you get to the $400,000 account balance that the majority of these contracts can be traded if you are only looking to risk 1% of your equity per trade. That does NOT assume you are pyramiding either.

In the CTA world, an aggressive trader will commit between 10 and 15% of his equity to margin. So for the $400,000 account, the trader will have between $40,000 and $60,000 to use for margin. That does not leave a whole lot of wiggle room for wild days. In fact, silver and RBOB gasoline don’t qualify for this account size because the $ Volatility exceeds 1% of the account balance.

Your job…your #1 priority…is to be able to come back and trade tomorrow. Try and bull through a directionless market and you will get your a** handed to you. I’ve been there. Think of these annoying losses as tuition and sit on your hands for a while. In 5 years no one will remember if you took a few days off, but they will all remember how you vaporized their cash if you don’t.

What to do:

• Don’t trade until the volatility decreases substantially

• Trade the mini contracts

• Trade commodity ETNs or ETFs

• Take the time to learn about inter- and intra-commodity spreads

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If you sold in early May you’re doing well now, either having locked in gains or by being short. The weekly S&P 500 chart looks weak. I wouldn’t want to be telling investors to asset allocate and that they have to buy and hold coming into this summer. If you have stockbroker or Investment Advisor friends doing this for clients, I think they’re going to be getting a lot of nervous phone calls during their summer vacation…

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The June contract traded above 7600 today. Despite what you may think of the USD long or short-term, you normally don’t want to fight the tape.

In the near-term the price looks to head higher. The chart above depicts what Victor Sperandeo calls a “123 Reversal” pattern, which is reliable.

Maybe the USD is the “evil of two lessers?”

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One of the things I spoke to Richard Sandor about at the Milken Institute’s Global Conference was the relationship between WTI Crude and Brent Crude, as well as the ratio between WTI Crude and Natural Gas.

The chart above depicts the difference between Brent and WTI crude. You can notice a trend in the difference in the spread in that Brent is trading at more than $12 premium to the WTI crude. What does that say for Brent? What does is say for WTI? It may signify that Brent crude is becoming the global standard and is in higher demand.

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This chart depicts the ratio between WTI Crude and Natural Gas. This ratio historically trades near 10, but in recent years has been over 20. Does this ratio say something more about crude or natural gas? It may be both. What say yooze?