NEW YORK (
) -- There have been some big market moves recently. Contrarians try to identify possible reversals. My initial
was disappointing, yielding a return of 1.79%. More aggressive risk management will be applied this fall to try to improve returns.
Idea No. 1 -- Buy Natural Gas
United States Natural Gas Fund
has had a remarkable run lower the past 12 months. It has dropped to $11.68 as of Sept. 24, from a close of $36.45 a year earlier. That's a decline of 68%. See the following chart.
The past three weeks are the first time in a year that three advances in a row have occurred and the last two weeks have highs tight against the linear resistance line. Now is a good time to open a position in opposition to the year-long trend with a market order. A trailing 15% stop loss order will be placed.
We also will track
First Trust ISE-Revere Natural Gas
, which invests in stocks that track the index after which the investment is named. This investment has a one-year loss of 20%, compared with the 68% loss for UNG.
Idea No. 2 -- Buy North American Energy Production
This sector has declined in four of the past six quarters and is basically unchanged so far in the current quarter. My choice to play this sector is
Enerplus Resources Fund
. This Calgary based, open-end investment trust, which owns a number of oil and natural gas producing properties in Canada and the U.S., currently pays a 9% dividend. This is likely to be reduced by 2013, when ERF probably will convert to a traditional corporate structure. For the contrarian portfolio, ERF will be bought at the market and a 10% trailing stop loss order kept in place.
Idea No. 3 - Buy Silver
Gold has been rallying and seems to have established a price above $1,000, although it is just below that level as I write this article. The $1,000 level was tested from above last week and again this week and the price held. There is a lot of enthusiasm among gold investors as a result of this. However, the ratio of gold to silver has been above the historical equilibrium for the better part of a year and I believe that silver has the potential for larger gains than gold if gold moves higher.
We will track this position with
iShares Silver Trust
. A $2 trailing stop will be maintained on SLV. Should gold close below $980, the SLV will be sold at the open the following day, if it hasn't already been stopped out. I also will buy
UltraShort Gold ProShares
at the same time. This idea could turn to "short gold" very quickly if the market turns.
Idea No. 4 -- Buy Corporate Bonds
This is a repeat from the summer contrarian portfolio, using
iShares iBoxx $ Invest Grade Corp Bond ETF
. This position will be entered with a market order. A trailing stop order of $2 will be used after opening the position. A more detailed stop strategy will be considered after a few weeks to try to avoid a premature stop execution on a whiplash move, as happened during the summer.
Idea No. 5 -- Short Financials
UltraShort Financials ProShares
will be used for this trade. This was attempted during in the summer and was exited with a stop loss execution for a loss of 5.4%. This position will be entered with a market order and a 5% trailing stop loss will be the initial risk control.
Idea No. 6 -- Sell Municipals
This position will sell short
iShares S&P National Municipal Bond ETF
. This is another position that was attempted in the summer contrarian portfolio, and was stopped out with a loss of 1.8%. This will be entered with a market order and a trailing stop loss buy order of $2 will be placed. This is like stepping in front of a speeding train because the chart for MUB has been very strong. In this case, I believe it is a propitious time to test the speed of the train again.
The two, very well-defined trading channels for the past two months define the speeding train. Although it is not found in any of my references on candlestick charting, the dramatic hammer pattern on Sept. 22 is being interpreted as a shot across the bow. Note that an inverted version of this pattern, called a "hanging man," came early in this strong advance for MUB.
Idea No. 7 -- Sell the S&P 500
We have seen one of the most dramatic rallies in stock market history. Everyone is waiting for the
Dow Jones Industrial Average
to hit 10,000. This is a good time to test another speeding train.
There were failed attempts to have corrections in August and early September. Maybe the third try is the charm. This will be traded using
UltraShort S&P500 ProShares
, with a stop loss at $38.50, just below the intraday low of Sept. 23.
Idea No. 8 -- Sell Oil
Another repeat from the summer will use
UltraShort Oil & Gas ProShares
. This was a position which was up 30% at one point and most of the gain was given back before the position was closed because of lax risk management. This time we will try to manage risk more aggressively.
The position will be opened with a market order and a stop loss order will be placed at $13.70, just below recent intraday lows. The stop loss order will be moved up if DUG advances and closes above $15.50 to a 10% trailing stop.
If this position is stopped out, a position will be opened immediately in the ultra-long companion ETF,
Ultra Oil & Gas ProShares
More frequent portfolio updates will be published this fall.
-- Written by John Lounsbury in Clayton, N.C.
At the time of publication, Lounsbury had positions in SKF.
John B. Lounsbury is a financial planner and investment adviser, providing comprehensive financial planning and investment advisory services to a select group of families on a fee-only basis. He worked for 34 years with IBM, and spent 25 years in R&D management and corporate staff positions. He also was a Series 6, 7, 63 licensed representative with a major insurance company brokerage for nine years.
Specific interests include political and economic history and investment strategy analysis. He holds degrees from the University of Vermont, Columbia University and the Illinois Institute of Technology, where he studied chemistry, physics and mathematics. He is a contributor to Seeking Alpha and his own blog,