Last night after taking a hit on a DGAZ position I transferred to a bullish position in UGAZ. I generally don’t like to do that, but weather reports are actually starting to call for a colder winter than previously anticipated. The minor La Niña we are expecting this winter has been adjusted further north, meaning lower temperatures and a drier winter.s
Adjusted models make it seem highly unlikely that natural gas prices could stay below $3/MMBtu, so UGAZ will have to follow over the next few days.
It’s looking increasingly like I may have to close my position at a slight loss. DGAZ opened down 30 cents from yesterday’s close at 7.70, and volume has remained low so far today. The price may not rebound before the OPEC meeting later in the day, which is more of a risk than I’m willing to take on this position.
From what I have read it seems that over the last week or so NG December futures have been oversold putting upward pressure on DGAZ. This oversold condition is starting to evaporate. Regardless of the truth in that this news is starting to spread – inevitably eroding investor confidence. Prices will drop further today.
Today in pre-market trading I managed to take a favorable position in DGAZ. Analysts over the weekend called for an even warmer than previously predicted winter, and more doubt has been cast on the possibility of an OPEC production freeze. Storage reports aren’t out yet, but there are already significant number of bearish signs for the price of natural gas. My entry price was at $7.55, and I don’t plan to exit until at least $8.00.
My initial exit price was at $7.50, but I moved it up to $7.64 to ensure some profitability from this position even if the worst happens. Overall I am very pleased with this position, and may continue to choke up my exit price if conditions improve.
Today we learn about Settlement Violations
Today I’d like to start covering a topic I accidentally learned a good deal about: Settlement Violations. There are several types of settlement violations, but the one about I have recently become most educated is called a “Good-Faith” violation. In the simplest terms a good-faith violation occurs when you purchase a security with unsettled funds and then sell it again before the funds you used to buy it settle.
This can be an incredibly easy thing to do; especially if you’re hazy on the concept of T+3. Let’s take a minute to look at this in more detail. Let’s say it’s November 1st and you have held $1000 in shares of XYZ for some time now, but decide to sell it. The details of your trade will include information like the following:
Trade Date - 11/1/2016
Settle Date - 11/4/2016
Quantity - 100
Price - $10
Principal - $1000
Commission - $10
EXCH PROC Fee - $0.10
TOTAL - $989.9
Ignoring all of that other information let’s focus on the second line “Settlement Date”. That is the date on which you receive the agreed principal net commissions and the exchange processing fee. Basically, even though you sold your shares on November 1st you technically don’t get any money until November 4th. Most brokers will help you circumvent this by allowing you to buy more shares using your unsettled funds – you could use $900 to buy shares of ABC stock as soon as you have sold your XYZ stock.
Assuming you do this, you now have shares that you haven’t paid for yet provided to you by your broker. Now let’s imagine that on November 3rd the price of ABC stock increases by 25%. Your $900 investment is now worth $1125, and you decide to take those gains and close your position. Unfortunately you have now committed a settlement violation. Until your account has enough settled funds to cover the purchase of ABC stock you cannot sell those shares.
Today we look at continued gains in UGAZ and what that might mean for prices after the weekend
UGAZ – The market opened significantly closer to Wednesday’s close at 22.30, we shouldn’t see this trend continue – OPEC’s failure to agree to a production freeze means that prices will inevitably fall back to around 20.00
DGAZ – This means we’re going to see a sharp rise in DGAZ, if not today then by Monday morning. We might even see prices as high as 9.50 again like we did Wednesday morning. I expect prices to open dramatically higher on Monday, and would recommend holding any position until then.
Recently I have added Cornerstone Strategic Value Fund (CLM) as a substantial part of my long-term holdings. CLM is a dividend distributing security that as far as I can tell is currently undervalued. For fy-2016 they are distributing 0.28 per month per at a price of 14.28 which means they are promising dividend backed growth of nearly 23% annually.
While the distributions will fall next year to 0.22/share, this is still impressive growth and impressive future value. If this trend were to continue these shares are still very undervalued, and I could see up to a $3 increase in value during the next year.
While everything is a risk, and no one can ever be certain I am confident that this is a safe long term position to hold.
Today I’d like to go into the story of my first (and fortunately my only) big loss. Yesterday I opened a position in DGAZ in advance of the EIA weekly storage report being down from last week. Unfortunately I had not realized that analysts had anticipated worse than this, and so the price of natural gas spiked, immediately sending my position into a nose dive.
By the end of the day it was down nearly 8%, and based on longer term value assessments of DGAZ I decided to wait it out. The next day it opened 5% up, and my losses were dramatically lessened. I made the decision to close, 3% down and somewhat shaken by my first negative encounter with a highly leveraged ETF.
By the end of that day my position would have been down 12% so I am somewhat pleased that I made the best of a bad situation, but I am disappointed that I missed a fact that everyone else saw. In the future when trading with DGAZ I will place a hard limit order as an exit strategy, as my queued order wasn’t able to execute fast enough to get me out as the price dropped.