| Best of the Best: Today's Top Investment Ideas |
| Pairs trade: Long gas, short oil |
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| Thursday, 25 June 2009 | |
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"There are always things to worry about. Geopolitical risk, doubts about the economic recovery, profit taking, worries about government spending and debt, fears of new regulations, the upcoming Fed meeting....take your pick. "The markets seem to have their own rhythm apart from the current news and economic events. A pullback after our long run would not be unexpected after a set of weak advances and weak pullbacks. "If this selloff is real, we would actually view it as an opportunity. An even bigger pullback will create a bigger opportunity. We know from the leading economic indicators that the economy is improving and that we will soon be seeing economic news that will surprise on the upside. "Meanwhile, we are recommending a 'pairs trade' in our model portfolio. We have noticed that the spread between the price of natural gas and the price of oil is quite large. We expect that gap to close, due to either lower oil prices, higher natural gas prices, or perhaps both. "To profit from this situation, we are long natural gas by owning US Natural Gas (NYSE: UNG), an exchange traded fund that tracks the price of natural gas), and we are short oil by owning PowerShares DB Crude Oil Short (NYSE: SZO), an ETF that moves inversely with the price of oil. "We emphasize that this is a trade, not a long term investment, and we expect to take our profits once the gap closes. Our probability of success is greater by owning both positions because it is very likely that the gap will close, but harder to predict which commodity will move to close it." |
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