The first month of the year was one of the most volatile in recent memory. Stock market selloffs, plunging oil prices and the resurgence of gold as a safe haven all made for an interesting and highly volatile month. Amid the hysteria, there was money to be made for savvy investors who were able to anticipate trend reversals and short sell the right asset classes.
With the power of hindsight, we explore some of the most profitable trades of January. As you’ll quickly see, the financial markets always provide opportunity. Sometimes you just have to look a little bit harder to find it.
Southwestern Energy Co. (SWN)
Position: LONG
Change: +$1.78/share between Jan. 4 and 29.
2015 was a disastrous year for this US-based oil and natural gas company. Its total return last year was an incredibly lackluster -74%. That partly explains the company’s massive rebound in January, where it gained 25%.[1] SWN could have been purchased for $7.11 at the start of the month before peaking at $8.89 on January 29. In terms of percentage gains, SWN was the best performing S&P 500 company of the month, which is quite bizarre when you consider that oil prices plumbed 13-year lows in January.
Range Resources Corp (RRC)
Position: LONG
Change: +$3.80/share between Jan. 4 and 29.
The story of Range Resources Corp. is quite similar to that of Southwestern Energy Co. The stock’s total return was -54% in 2015 before rebounding 20% in January, making it the second-best performing S&P 500 company of the month. Strangely enough, six of the top ten performers on the S&P 500 in January were energy companies.[2]
Verizon Communications Inc. (NYSE: VZ)
Position: LONG
Change: +$4.89/share between Jan. 4 and Feb. 1.
2016 has been a rough year for the technology sector, but not for Verizon Communications. The telecommunications giant led all other technology companies on the S&P 500 as of early February. In fact, telecommunications companies as a whole were performing better than the sector average. Verizon shares gained more than 10% in January. By comparison, the Technology Select Sector SPDR ETF (XLK) lost more than 2% on the month and would extend its year-to-date losses to -5.1% after the first full week of February.
Michael Kors Holdings Ltd. (NYSE: KORS)
Position: LONG
Change: +11.28/share between Feb. 1 and Feb. 3.
Consumer discretionary stocks were the best performers of 2015, as companies tied to US consumers performed much better than firms relying on international markets. Consumer discretionary stocks gained nearly 10% in 2016, compared with the S&P 500 average of 1.4%.[3] The picture was much different in January, as consumer discretionary stocks were among the worst performers on the S&P 500. However, several companies stood out from the rest at the beginning of the year, and none more so than Michael Kors Holdings. The luxury fashion company spiked more than $11 at the beginning of February after treading water over the previous 30 days (the gains didn’t occur in January, but we felt it was close enough).
S&P 500 Utilities Select Sector SPDR ETF (XLU)
Position: LONG
Change: +6.3% in January.
We know by now that January was a disastrous month for the S&P 500 Index. To put it in perspective, the S&P 500 I declined 9% in the first two weeks of the 2016, its worst start to a year ever.[4] The lone bright spot for the large-cap index was the utilities sector, which rose more than 6% in the first 30 days of the year. The S&P 500 Utilities Select Sector SPDR ETF enjoyed a highly profitable month thanks to higher demand for heating during the winter season. We don’t blame investors for missing the boat on utilities, despite the winter season. That’s because companies in this sector carry a high debt load due to significant infrastructure investments. Companies with heavy debt burdens usually perform better during periods of low interest rates.[5] Although US interest rates remain very low by historical standards, the Fed’s decision to lift the federal funds rate in December may have spooked some investors.
Dow Jones Industrial Average
Position: SHORT
Change: -975.85 points between January 4 and 20.
The Dow Jones Industrial Average declined nearly 6% in all of January, but was down 9.5% through the first three weeks of the month. Investors looking to capitalize on the volatility would have done very well short-selling the Dow through the ProsShares UltraShort Dow30 (DXD), which corresponds to two times the inverse of the daily performance of the industrial blue-chip.[6]
The Dow was hit especially hard in January by plunging commodity prices. Its chief energy components had a difficult month on the heels of a devastating fourth quarter. Exxon Mobil Corp (NYSE: XOM) saw its profits decline 58% in the fourth quarter, with revenues declining over 31% compared with year-ago levels.[7] Chevron Corp (NYSE: CVX) also reported its first quarterly loss in more than 13 years. America’s second-biggest oil producer has already cut its 2016 budget by 24% in order to contend with extremely low oil prices.[8]
West Texas Intermediate (WTI) Futures Contract
Position: SHORT
Change: -$10.21/barrel between Jan. 4 and 20; +$7.07/barrel between Jan. 20 and 29.
January was the month for short-sellers. Nowhere was this more apparent than in the energy futures market. West Texas Intermediate for March delivery plunged 28% in the first three weeks of the year, bottoming out at $26.55 a barrel. Investors who shorted WTI at any time early in the month could have made a lot of money when the price bottomed. That’s not the end of it, though. Short-sellers who rebought WTI on January 20 saw the price of WTI spike more than $7 – that’s 27% – just nine days later.
Brent Crude Futures Contract
Position: SHORT
Change: -$9.34/barrel between Jan. 4 and 20; +6.86/barrel between Jan. 20 and 29.
The month of January was just as volatile for international benchmark Brent crude, which collapsed more than 25% in the first three weeks. Brent bottomed out at $27.88 a barrel, a fresh 13-year low. Much like WTI, buying back Brent on January 20 was one of the best moves of the month. The global benchmark rallied $7 in just over a week.
Nikkei 225
Position: SHORT
Change: -3,016.45 points between Dec. 29 and Jan. 21; +1,847.97 between Jan. 21 and Feb. 1.
Japan’s Nikkei 225 experienced all kinds of carnage in January, plunging 25% in the first three weeks of the month. Tokyo’s benchmark officially entered into bear market territory as investors rushed to escape extreme volatility. Investors who were smart enough to short Japan with the the NEXT FUNDS Nikkei 225 Inverse Index Exchange or Direxion Daily Japan Bear 3X Shares (JPNS) could have capitalized in a big way. While hindsight is 20/20, you didn’t have to be Nostradamus to short Japanese stocks at the beginning of the year. After all, Japan’s markets had been trending downward for much of December as the fourth quarter rally began to fade.
Gold Futures
Position: LONG
Change: +$67.80/ounce between Dec. 31 and Feb. 1.
Gold and other safe-haven assets were in high demand at the start of the year. The yellow metal rose consistently throughout the month amid the most violent stock market selloff since the “Black Monday” crash of August 2015. Gold futures ended 2015 at $1,060.20 US per troy ounce on the Comex division of the New York Mercantile Exchange. Prices would reach a two-month high of $1,128.00 per ounce on February 1. (In fact, gold futures enjoyed even greater momentum through the first week of February, where they rose to nearly $1,200 per ounce, the highest level since June.)
Gold’s ascendancy contradicted most forecasts for the yellow metal. The Federal Reserve’s decision to raise interest rates in December for the first time in more than nine years was supposed to be the death sentence for gold, which is mired in a prolonged bear market. While the latest rally isn’t enough to turn us bullish on the yellow metal, the latest says a lot about investors’ risk sentiment.
USD/JPY
Position: LONG
Change: +3.6% between Jan. 21 and Feb. 1.
The USD/JPY enjoyed a nice rally in the final week of January. Investors who entered long on the USD/JPY and held their position until February 1 could have made close to 4%. The pair reached its highest level in more than a month after the Bank of Japan (BOJ) shocked investors by adopting negative interest rates on some of its deposits in a desperate attempt to revive a moribund economy by encouraging lending. With the move, the BOJ joined the European Central Bank in imposing negative interest rates on commercial banks.
The USD/JPY would eventually give back all of its gains in early February as the dollar suffered a four-day losing streak at the hands of interest rate speculation. Clearly, expectations about monetary policy continue to dominate the currency markets. The 300 pip advance in the USD/JPY immediately after the BOJ adopted negative interest rates indicates that investors are still looking to policymakers for direction.[9]
USD/CAD
Position: LONG
Change: +700 pips between Jan. 4 and Jan. 18.
The oil price collapse in January not only hit commodity prices, but nations and currencies tied to them. Canada was among the hardest hit. The Canadian dollar got hammered in January, falling in lockstep with crude prices. The USD/CAD exchange rate surged more than 5% within the first three weeks of the month, reaching its highest level in 13 years. The USD/CAD exchange rate peaked at 1.4578 on January 18, gaining more than 700 pips over a 14-day period. Gains of this magnitude are exceedingly rare in the forex market, especially over such a short time horizon.
USD/CAD
Position: SHORT
Change: -780 pips between Jan. 18 and Feb. 4.
Remember that massive USD/CAD rally we just talked about? Well, it went as quickly as it came. Investors who anticipated the reversal (which was tied to oil prices) took advantage of a nearly 800-pip drop in two weeks, including nine daily drops over an 11-day period. Imagine shorting the USD/CAD at 1.4578 and buying it again at 1.3784.
The loonie’s rebound is likely short-lived, with the Bank of Canada (BOC) reportedly mulling over another rate cut to contend with collapsing oil prices.[10] Canada’s economic growth was subdued in 2015 and is expected to pick up only gradually later this year.
EUR/USD
Position: LONG
Change: +350 pips between Feb. 1 and 5.
For this one, we’re going to cheat again by going slightly outside our January 31 endpoint. For the most part, the currency markets haven’t behaved as expected in the first six weeks of the year (after all, Goldman Sachs tipped a long USD vs. short EUR as its top trade of 2016).[11] The euro has been surprisingly resilient so far this year, despite reassurance from the European Central Bank (ECB) that it is prepared to do whatever it takes to bring inflation back toward its target of just below 2%.[12] The EUR/USD gained nearly 350 pips through February 5, as investors began to doubt the Federal Reserve’s ability to raise interest rates in 2016. Once again, central bank speculation was at the centre of major movement for a particular currency pair, a trend expected to continue throughout 2016.
Risk warning: Forward Rate Agreements, Options and CFDs (OTC Trading) are leveraged products that carry a substantial risk of loss up to your invested capital and may not be suitable for everyone. Please ensure that you understand fully the risks involved and do not invest money you cannot afford to lose.Our group of companies through its subsidiaries is licensed by the Cyprus Securities & Exchange Commission (Easy Forex Trading Ltd- CySEC, License Number 079/07), which has been passported in the European Union through the MiFID Directive and in Australia by ASIC (Easy Markets Pty Ltd -AFS license No. 246566).
[1] Philip van Doorn (January 31, 2016). “10 best, 10 worst U.S. stocks so far in 2016.” MarketWatch.
[2] Philip van Doorn (January 31, 2016). “10 best, 10 worst U.S. stocks so far in 2016.” MarketWatch.
[3] Sector SPDR. Sector Returns by Year 2006 – 2015*.
[4] Joseph Adinolfi and Barbara Kollymeyer (January 15, 2016). “U.S. stocks post worst 10-day start to a year in history.” MarketWatch.
[5] Utilities Sector. Investopedia.
[6] ProShares. DXD Ultrashort Dow30.
[7] Maria Gallucci (February 2, 2016). “Exxon Mobil Corp. (XOM) Fourth-Quarter Earnings Fall 58%, Beating Estimates.” IB Times.
[8] CNBC with Reuters (January 29, 2016). “Chevron posts loss of 31 cents a share.” CNBC.
[9] Sam, The Trading God (January 29, 2016). “Dollar Spikes after BOJ Adopts Negative Interest Rates.” TradingGods.net.
[10] Dana Flavelle (January 15, 2016). “Odds favour Bank of Canada rate cut, economists.” The Star.
[11] Sam Ro. (Nov. 19, 2015). “GOLDMAN: Here are the 6 best ways to trade the world in 2016.” Business Insider.
[12] Claire Jones (February 4, 2016). “ECB will not ‘surrender’ to low inflation, Draghi says.” Financial Times.
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