Trades continue to trigger in the on-going sell-off in commodities. In my last listing of commodity stocks that have erased all their post-QE2 gains, I did not include stocks in agriculture, oil or natural gas. I have now completed that scan and have posted the results below. I divide the list into stocks that were included in the explanation of the rules and picks for the strategy on making profits from physical assets.
Agriculture stocks on the list:
- Mosaic (MOS) – I somehow missed the trigger point over the first three days of this week. After an 8% pop and a pocket starting to overflow with picks, I will just wait MOS out for now.
Agricultural machinery stocks (not included in the list):
Oil and natural gas stocks
On the list:
- PowerShares DB Oil Fund (DBO)
Not on the list:
- Encore Energy Partners (ENP) – High dividend yield; the stock has already recovered most of its July’s losses.
- Encana (ECA) – Oct 27 calls were very active on Aug 9 (see “Options Say Look for Encana Reversal”). However, note that the open interest for the Oct 27 puts is almost as high as the calls. This means that it is just as likely that large bets are being placed on a big move in either direction.
- ENI SpA (E)
- Ensco Plc (ESV)
- Eog Resources Inc (EOG)
- Ivanhoe Energy Inc. (IVAN)
- Noble Corp (NE)
- Petroleum Development Corp (PETD)
- Quicksilver Resources (KWK) – The SEC issued a subpoena to KWK regarding reporting on shale gas wells. The stock fell 23% in reaction on Aug 8. For more see “Quicksilver Slides, SEC Investigates Shale Production.”
- Suncor Energy (SU)
- Talisman Energy Inc (TLM) – There was heavy call buying on Aug 5 across several expiration months. For more see “Update: Top unusual option activity.”
- Ultra Petroleum Corp (UPL)
- Whiting Petroleum Corporation (WLL)
Special note (owns no assets in the ground): Diamond Offshore Drilling (DO)
It was a good coincidence to see heavy calling buying in some of these names as they lost their post-QE2 gains. Although I did not include ECA and TLM on the strategy list, I made small purchases in each.
In past posts on potential plays on a crash in commodities, I did not fully explain the rationale for using the “vocalized” launch of QE2 as a trigger point. For example, I could have established a rule that required a majority or some otherwise large fraction of the commodity stocks on the list to sink to pre-QE2 levels. However, the strategy requires acknowledging the high level of uncertainty on how a crash in commodities will play out. For example, the current crash is not ostensibly about the potential of an economic slowdown in China. Yet, today’s worries and panic were still enough to drive a large handful of commodity names back to pre-QE2 levels. If this crash turns out to represent the extent of the damage, I will have a good number of commodity-related stocks already in play. If China does finally slow down, I will be much more aggressive in accumulating these stocks. (To review the thesis inspired by Jeremy Grantham see “Preparing for Profits in a Resource-Constrained World.”)
Disclosure: I am long ECA, TLM.