Executive summary:
- Short-term "exogenous" events can create investment opportunities.
- Weather, politics and geopolitical friction can all create investment possibilities.
- Cold winter may create pent up demand that will be recognized later in the year.
_______________________________________
Recently, I also wrote numerous bearish articles on natural gas, which is now headed for its worst week since 1996.
Natural Gas Heads for Biggest Weekly Drop Since 1996 on Stocks
Natural gas highlights one of my favorite investment strategies, a tactic I call "exogenous event trading." I scan the markets looking for large pops in the price action that are due to sudden and unexpected events that couldn't have already been discounted into the markets, i.e. exogenous. I then determine if the event is short-term in nature, or something that fundamentally changes the future prospects for gains. Weather and other natural phenomenon are the most obvious short-term events that can drive stocks higher. Last year I wrote about how hurricane Sandy had driven the demand for home generators unexpectedly higher. I then did a follow up article to highlight that once the storm passed, future sales of generators were expected to fall, as were earnings.
I recently wrote an article titled "Sandy's Silver Lining; Generac" that described how Hurricane Sandy was driving sales for Generac (GNRC) generators. However, I noted that I wouldn't invest for the long term based on one single hurricane.
This year the exogenous event driving earnings is the winter of the polar vortexes. The extremely cold winter being caused by global warming has taken a toll on retail sales. Janet Yellen in her testimony yesterday stated that the impact of the winter is hard to determine. I'm pretty sure that what she will discover is that items essential for survival during a near mini ice age sold well, everything else didn't as people struggled to stay warm inside their fracking produced natural gas heated homes. Natural gas, heating oil, winter clothing, home insulation, food for home preparation, snow shovels, ski resorts, ski equipment makers, hot chocolate mix, internet retailers, parcel delivery and space heaters all should show growth in earnings. Restaurants, retail box stores, entertainment, discretionary goods, ice cream and swim ware are all likely to suffer. Ironically tanning salons may be the counterintuitive weather trade, as people take a local or staycation to the spa to bask in some memories of the good ole days of global warming.
The earnings dip should however be temporary as "pent up" demand simply gets pushed from Q1 2014 into Q2 2014. The winter has most likely simply postponed the purchases, not eliminated them all together. I would watch for many companies that report the winter hurt their earnings in Q1 to have a rebound effect in Q2. Many purchases are simply shifted in time, not erased from the shopping list.
Another way to play "exogenous" events is by using the inverse VIX ETF (NYSEARCA:SVXY). Exogenous events that are short-term in nature may cause sudden spikes in volatility of the S&P 500. The collapse of the Bitcoin Mt Gox is an example where a sudden shock in a single exchange has driven the value of Bitcoin down on all exchanges, even though the other exchanges are not experiencing the same problems as Mt Gox. That emotion driven event has likely artificially depressed the "value" of the Bitcoin and spiked its volatility. Once the fear and panic subside, fear will turn to greed, and the Bitcoin will likely take another run for a new high. I know I've been very very negative on Bitcoin, but irrational markets, especially those with a near religious following, can remain irrational for a lot longer than one would expect.
While the SVXY isn't applicable to the Bitcoin, short-term shocks that impact the S&P 500 are ideal for an "exogenous" trade using the SVXY. Once a short-term event like a Government shut-down drives a spike in volatility, you buy the SVXY pretty much knowing that the Republicans will eventually cave. While Republicans may be willing to put on some ill conceived counter productive childish political theater, they aren't foolish enough to default on the US debt. Once the Republicans cave, the VIX returns to normal, and the SVXY turns a profit as things slowly return to normal. The key is identifying the periods that are not normal, and timing the trade correctly.
Manufactured political crises, temporary weather related events, unexpected bankruptcies of major corporations and heightened tensions between hostile nations can all serve as "exogenous" events that provide unique opportunities for investors. Once the SNP 500's volatility has spiked, investors interested in the "exogenous" trading theory should start looking for an investment strategy to capitalize on the "return to normalcy."
Disclaimer: This article is not an investment recommendation or solicitation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice. Past performance is no guarantee of future results. For my full disclaimer and disclosure, click here.
Disclosure: I am long SYNM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I own calls on REGI
