Market Volatility: Not a Bad Response

By Adam Lass & Bryan Bottarelli

Natural Gas Prices: A (hot and sweaty) Taste of Things to Come

Blue-Chip Investing
Natural gas near-term futures contracts did indeed peel off 74% off between December of 2005 and September of 2006. But since then, we have seen a return of more than 123%, with lots of room left for this laggard to join its petrochemical brethren in their record-breaking upside runs.

Trading Tactics
On one hand, we have a market on the heels of falling around 300 points in a week…

For months now, when we have spoken about “rising energy costs,” we have been referring almost exclusively to crude oil and gasoline, as natural gas is thought to be in a total swoon.

The truth of the matter is that NG near-term futures contracts did indeed peel off 74% between December of 2005 and September of 2006. But since then, we have seen a return of more than 123%, with lots of room left for this laggard to join its petrochemical brethren in their record-breaking upside runs.

As with crude oil, it’s all a question of demand, and demand is about to spike, especially in the American South as millions celebrate the arrival of summer by closing windows and cranking on the AC.

Today, for example, high temperatures in major Florida cities hung out in the low-90s. But the God-awful 99% humidity that so many southern towns suffer through (including yours truly’s own Baltimore) push perceived “heat index” readings up to 105 degrees.

Now shipping gas is a tricky business: to maintain system integrity, throughput must remain within a narrow band, or bad things happen, like line freezing or disastrous leaks.

So when NG shippers like Florida Gas Transmission get high-demand projections, they issue alerts to natural gas shippers warning that they must keep to within 25% tolerance of scheduled volumes.

Today, Florida Gas Transmission has issued just such an alert for the folks who shove some 2.1 billion cubic feet per day down its 5,000-mile pipeline stretching from south Texas to south Florida. And this alert is certainly the first of many to come as we move into this major demand period.

This is nothing but good news for the folks selling gas who are in essence being told “don’t you dare sell less.” The owner of this particular pipe is one Citrus Corp, which in turn is owned by Southern Union Co.’s NG unit, SUG.N, Panhandle Energy and (wait for it, all you WOW readers) El Paso Corp. natural gas unit, EP.N.

Trading Tactics
Market Volatility: Not a Bad Response (at least until midafternoon)

The Dow lost 279 points last week, so the fact that the markets are attempting to recoup some of those losses today is, in my book, a strong response.

Last Friday’s 185-point drop was attributed to rising Treasury yields, global interest rates, and a continued fall-out of the subprime lending market.

But this morning, despite news that the inventory of homes for sale hit a 15-year high, the markets were trading to the upside -- which meant that the recent trend of “buying the dips” looked like it would continue.

Now don’t forget that the Fed will meet this week -- so we might experience some flat trading leading up to Thursday’s announcement. Also don’t forget that the market tends to like what Chairman Bernanke has to say, which has sparked rallies in the past.

Nevertheless, the Dow turned an intra-day day of over 100 points into an afternoon loss of 40 points. Faced with such intra-day volatility, we have an interesting situation on our hands. On one hand, we have a market on the heels of falling around 300 points in a week. On the other hand, we have a market that’s been known to buy the dips, especially in a week where the Fed will speak.

So really, the best way to play this situation (from a tactical trading standpoint) is to own a position in both calls and puts -- and that’s exactly what Adam and I are planning to do in tomorrow’s WOW alert.

By owning calls on a strong company and puts on a weak company, you’re putting yourself in the very best position to lock in a profit no matter what direction the market moves. All you WOW members, stay tuned for this special 2-for-1 recommendation coming tomorrow!