The CAT Came Back (CAT,GS,DIA,IYT)

The CAT Came Back (CAT,GS,DIA,IYT)

The CAT Came Back (CAT,GS,DIA,IYT)


It’s not easy to measure the impact geo-political events will have on markets.  Indeed, most headline-grabbing happenings – including live fire incidents between sovereign nations – end up having a negligible effect on securities prices.


That said, if the fear that a major conflagration might erupt captures traders’ imaginations, then nothing will stop even the coldest hands from divesting themselves of everything in their portfolios save cold, hard cash.

The current developing conflict in the Persian Gulf between Qatar, on the one side, and a group of powerful Arab nations on the other (including Saudi Arabia, Jordan, UAE and Egypt), has an ominous ring to it, and no one should believe that because of a shared language or religion, these nations would be loathe to engage in open conflict with one another.


Arab civil wars have been as plentiful as they’ve been deadly, as the current conflict in Syria makes abundantly clear.


But never before have we seen such a potency of firepower available to all sides as we do in the current crisis.  Nor have we seen such clearly drawn alliances as we now do.  All of which leads us to surmise that an internecine Arab conflict that seeks to neutralize Qatar in the region could have devastating effects for the Middle East as a whole.


And because Qatar is a major source of natural gas, the price of that commodity would also likely see sharp moves should tensions boil over.


Markets Express Fear


Could it be that this was precisely what we witnessed earlier this week when the price of gas gapped higher by 3.6% in a single trading session – after the anti-Qatar bloc issued a list of non-negotiable demands, only the fulfillment of which would lead them to consider lifting a trade and diplomatic embargo on the tiny nation?


We believe so.


Among other things, that list includes closing Al-Jazeera, the news outlet that survives on Qatari funding, shuttering a local Turkish air base and scaling down relations with Iran.


Not exactly your run-of-the-mill, million buck hostage situation.


And that’s why we also aver that should the heat be turned up further on Qatar, we’ll likely see a concurrent rise in the price of NYMEX natural gas, represented below by the United States Natural Gas Fund (NYSE:UNG).


Take a look –

This is UNG for the last six months, and the technicals are entirely constructive for gas bulls.


Note first the positive divergence between RSI and MACD (in green), on the rise since late March, and price, which has formed a double bottom at $6.50 over the same time frame (in blue).


Both of these items are bullish indications in themselves.


Add to that an island reversal pattern in UNG trading that occurred last week (black circle), and you have another strongly positive technical thrown into the mix.


Bullish island reversals – like the one noted above – are rarer than their bearish counterparts and also more reliable.  They consist of a gap lower, followed by another gap up in the same trading range.  They’re usually indicative of a change in trend over the short- to medium-term.


Finally, you see the pop higher in price (at far right), with the last two trading days up on slightly better than average volume.



We currently have two open, bullish trades with UNG, and we’re considering adding to those positions on any further strength in the stock.  We’d urge one and all to consider hopping aboard.


A final note on the Qatari crisis: the Saudi led bloc has stated that Qatar has ten days to comply with its demands lest it be subject to further sanctions, economic or otherwise.  The clock on those ten days began counting last Thursday.

Before we get to our trade for the week, we have two open initiatives that require your attention.


The first was opened on March 30th in a letter called Theory and Practice.  There, we urged you to sell the DIA June 30th 210 CALL for $2.04 and buy the IYT June 16th 175 CALL for $1.15.  Total credit on the trade was $0.89.


Since then, the IYT CALL expired worthless, but the DIA CALL, scheduled to expire tomorrow, is trading in-the-money, with a value of $4.40.


Our advice is to roll it out.

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Next up is a trade we launched back in December of last year in an epistle entitled Financial Sector Mayhem: Buying Panic! Selling Panic!  The trade asked you to buy the GS December 31st 220 PUT for $5.30 and sell the GS December 31st 220 CALL for $5.55.  Total credit on the trade was $0.25.


In short, it didn’t work out, and we were left short one lot of GS at 220.


Today, we’ve decided we’ve had enough.  We’re buying back the stock at $223.22, taking a (temporary) loss of $322 and turning back to the options market to recoup it immediately.


And we’re doing it thus –

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To the trade!


This week we’re going feline, purring our way to profits on the back of Caterpillar Inc. (NYSE:CAT), makers of very large mobile machinery.


For those who follow the stock, you know that in April the company reported its first positive sales result in nearly half a decade.


See here –

But as of last month, CAT reports that sales from its Asia-Pacific office increased by a whopping 49%!


And that number has convinced us that the CAT – long since thought a goner – has come back.


Our trade is a simple one.

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Many happy returns,


Matt McAbby

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