Weekend Portfolio Analysis (June 3, 2016)

Market Conditions

Jobs… jobs… jobs… The market was quiet for most of the abbreviated trading week in advance of Friday’s much anticipated jobs report (or ‘lack of jobs’ report). Non-Farm Payrolls rose by just 38,000 in May, the weakest performance since September 2010, the Labor Department said Friday. This was significantly below the estimate by economists that payrolls would rise by 158,000. This sent the U.S. dollar into a tailspin against all of the major currencies. The U.S. Dollar Index futures (/DX) dropped 1.76% on Friday to its lowest point since May 17th.


The equity markets essentially shrugged off the disappointing May jobs report, which sent a negative signal for the U.S. economy but drove optimism that the Federal Reserve could wait longer before pursuing any short-term interest rate hike. Fed-fund futures, a popular tool used by traders to place bets on central-bank policy, have now taken the chances of a 25 basis point rate increase at the June 14 – 15 meeting off the table, with the odds now under 4% that the Fed will pull the trigger. For July, they’ve fallen to 42% from 58%.

The S&P 500 opened Tuesday at 2100.13 and closed on Friday at 2099.13, down 1.00 or 0.05% for the week.


Members of the Organization of Petroleum Exporting Counties (OPEC) failed to agree on production levels at the meeting in Vienna on Thursday. None of the major players (except Iran) indicated that they would be further flooding the market with oil anytime soon. With crude prices hovering around $50 per barrel, the pressure on oil producers has eased in recent months but could return if the global economy loses further momentum and demand falls with it. Oil prices also drew support from further signs of falling U.S. shale output, with Thursday’s data from the U.S. Energy Information Administration (EIA) showing a further decline in crude oil inventories by 1.4 million barrels last week. However, the U.S. oil rig count increased by the most since last December this week, climbing by 9 to 325, according to Baker Hughes. This report rekindled fears that U.S. shale drillers would turn the spigots back on as prices flirted with $50 per barrel.

Crude oil opened the week at $49.54 per barrel and closed Friday at $48.90 per barrel, down $0.64 or 1.29%.


On Friday, gold rebounded sharply after the weak non-farm payrolls data was released. /GC has reversed nearly half of its losses suffered in May after briefly topping $1,300 at the end of April. Low interest rates are a boon for gold because they weaken the dollar.

Gold futures for June delivery opened the week at 1215.1 and closed Friday at 1246.5, up 31.4 or 2.58%.


Natural gas prices rallied in a big way this week to their highest levels since January, as U.S. inventory data showed an increase in stockpiles that was smaller than expected. The natural gas market is currently oversupplied due to high production and sluggish demand this past winter. Prices have soared 11% in over the past four trading sessions on expectations that summertime demand for air-conditioning will increase nat-gas usage.



Trade Activity This Week

TradeHistory_060316This week was a very quiet trading week. I opened no new trades and closed only one trade.

With the huge spike in gold prices on Friday, I was able to exit the /GC Aug 1625/1050 strangle at 50% of maximum profit. The trade was opened on May 13 by selling two strangles for $1.20 each. Today, the GTC order triggered to purchase back both contracts for $0.60 each. This net a profit of $91.52 after commissions. Yes, the commission took a big chunk out of the profit, but this is one of the few downsides to trading futures options. The return on capital after fees was still a respectable 8.74% in 21 days.

Plan For Next Week

I am still looking for areas where implied volatility is elevated. With the huge spike in /GC and /NG prices, volatility has expanded a bit in these products. However, /NG can be tricky to trade and I do not wish to have over-exposure in this underlying. If the implied volatility in /GC options increases a bit more next week, I will look for trades that fit my criteria. I am finding it very difficult to ‘sit on my hands’ during this period of low IV, but I think there is still a lot of risk in these markets right now.

The portfolio is now down only 0.16% (about $20) for the year versus up 2.99% for the S&P 500 (see Trading Results).   The portfolio is currently 87% in cash.