There’s no getting around the big effect that news has on the trading landscape. In fact, ever since the onset of the financial meltdown and the Great Recession in late 2008, the trading game seems to be much more about headlines than fundamentals such as earnings, revenue and other metrics.
Now don’t get me wrong, I am not complaining about this circumstance. In some sense, trading today actually is easier than ever, because big headlines can mean swift moves in certain stocks or market segments. And, if you get it right, you’re in the money.
Recently, the headlines out of the Middle East, and specifically the potential U.S. military action in Syria, have caused a marked move in two key market sectors.
It’s no surprise that the energy space, and in particular crude oil prices, would see a spike on Middle East tensions. That’s been happening since the OPEC cartel dominated the oil trade.
The reaction by traders to recent news is to bid up crude oil to its highest price in two years, a move clearly seen by the price action in the United States Oil Fund (NYSE: USO).
Now, certainly the improving global economy argues in favor of higher oil prices. However, the spike we’ve seen in USO past the $39 mark is all about the recent headlines, and in my view, that is a circumstance that will correct itself in the days and weeks ahead.
Taking advantage of what I think will be a pullback in oil prices as the Syrian news fades can be accomplished via the United States Short Oil Fund (NYSEARCA:DNO). This fund moves inversely to USO, and as such, is a good way to get short oil without having to buy crude oil futures contracts.
Recommended Trade Setup:
— Buy DNO at the market price
— Set stop-loss at $28.99, approximately 8% below the current price
— Set initial price target at $34.64 for a potential 10% gain in two weeks
U.S. Treasury Bonds
When there’s global turmoil in the news, the most stable governmental assets in the world — U.S. Treasury bonds — get an influx of capital. So, it’s no surprise that over the past week we’ve seen a big rise in Treasury bond prices as represented by the iShares Barclays 20+ Year Treasury Bond (NYSE: TLT).
The chart below shows the gains in bonds off their recent lows.
Like oil, I suspect the recent flight to quality in bonds is short-lived, and likely to end as soon as the headline news fades. That means traders will once again focus on the real news moving bonds, and that is the Fed’s upcoming “tapering” of quantitative easing.
Any move to begin tapering as soon as the September FOMC meeting is almost certainly going to mean a resumption of the decline in long-dated Treasury bond prices and a rise in bond yields.
The recent headline-driven climb in bond prices is bound to revert back to its recent trend, and that means a buying opportunity right now in rising rate funds such as the ProShares Short 20+ Year Treasury ETF (NYSEARCA:TBF).
Recommended Trade Setup:
— Buy TBF at the market price
— Set stop-loss at $29.85, approximately 8% below the current price
— Set initial price target at $35.69 for a potential 10% gain in two weeks
The bottom line for traders is that headlines can lead to a short-term realignment of capital, and that short-term headline reaction can translate into fantastic buying opportunities once a “normal” state of being resumes. So, whenever headlines move markets sharply in one direction, there’s a good chance a contrarian play will be a winning move.
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