Grab Commodities While Prices Are Low

10/12/2011 7:00 am EST


We’ll look back on this era and be amazed at how cheap commodities are, says futures and options trader and broker Carley Garner. She also tells that a sharp rally in short-term Treasuries could be a selling opportunity, and says it’s crucial to use caution in the face of the continuing volatility across various asset classes.

Kate Stalter: I’m speaking today with Carley Garner of DeCarley Trading.

You’re known for your expertise on the bond market, and just taking a look at what’s happened, Carley, this week on the Barclays 20+ Year Treasury Bond Fund (TLT), for example: While the equity markets have risen, that particular ETF has gone down. Give us your take on the bond market, and what retail investors should be doing right now.

Carley Garner: Well, obviously, the bond market has been one of the most challenging markets to participate in over the last couple of years, simply because it’s no longer necessarily the efficient free market that we’d like to believe exists.

There’s a lot of government intervention, and there are all these Fed programs that are—I don’t want to say manipulating—but they are definitely influencing pricing, and it definitely changes the environment.

And it challenges speculators. That’s for sure. Not only do they have to pay attention to fundamentals, but they have to pay to attention to what the government’s doing. Operation Twist is the newest thing coming out of the Fed, in which they’re purchasing long-term, long-dated Treasury issues, and selling short term.

This is all kind of uncharted territory, so there’s still a lot of debate as to what the overall impact is going to be. You’ve probably heard this over and over for the last three years, but at some point interest rates are probably going to have to go up.

Is it going to be today? Is it going to be next week? Probably not dramatically, but over time, obviously, that’s probably the long-term view that you should hold on to.

As far as short-term goes, we look at seasonal pretty closely in Treasuries, and the seasonal top is right about now. In fact, it’s quite possible that the high we saw a week or so ago was the high of the market.

No one knows exactly where the tops are going to be, and where the bottoms are going to be, but the idea is to catch a piece in the middle. I think at this point, any sharp rally in Treasuries is a selling opportunity, and keep in mind, I say sharp rallies because chasing markets lower almost never works.

Markets don’t tend to be one direction—they tend to back and fill, and pivot around. So you want to make sure that you’re…you know the idea is to sell high and buy low. So you want to be careful about that.

Kate Stalter: Given all that then, what are you advising retail investors to do these days?

Carley Garner: If you’re talking about all the markets in general, the best play that I see on the board—and I can’t really give out too specific recommendations for compliance reasons—but the one thing that I can say is: I strongly believe that six months to a year from now, people are going to look back at $6 corn, and say “Man, that is cheap.” Corn is cheap at $6.

For anyone that’s been following the grain markets, it’s been a bloodbath for the last three or four weeks, and who knows where exactly, the bottom’s going to be. But if somebody that’s going to take a position, and maybe take a little heat in the short-term, long-term I think they might do well being bullish in the grain markets.

Kate Stalter: Rather than in other asset classes, for example?

Carley Garner: Not necessarily rather than, but maybe in addition to. I tend to be very optimistic at heart. I don’t want to say I’m always a stock-market bull, because that’s just not realistic. But I do believe that, in this type of environment, any large dip in the equity market is a great buying opportunity, especially if the S&P is under 1,100, I think really that’s the place to seriously consider a hedge long.

Kate Stalter: A lot of the advisors that I’ve spoken with in the past week or so, one thing that’s coming to a lot people’s attention is the high degree of correlation throughout various sectors, and even asset classes. What’s your view on that?

Carley Garner: That is absolutely correct, and that has made it extremely tough. We tend to be advocates of an option-selling strategy. The idea being, in options selling, more options than not expire worthless, and it’s probably better to be a seller than a buyer, most of the time.

However, with that type of a strategy, the conventional wisdom is, if you’re selling options in grains or energies, metals, and all over the place, you have a bit of a diversification, but that has absolutely not been the case lately. It’s kind of an all-or-nothing thing. Commodities and equities go up, or they go down. There’s no in-between, so it’s really made it a very, very tough environment for traders.

So, when you’re putting together a trading strategy or a portfolio, it’s super important that you realize when things start to get volatile, and uncertainty rears its ugly head, that’s exactly when everything starts to get correlated.

Because it’s either—I hate to use this—but risk on or risk off, and then you have to know that you might be holding corn, and you might be holding crude oil, you might be holding gold, but they’re probably all basically the same position, just different denominations of profit and loss.

Kate Stalter: In the light of all that then, Carley, what would you say is the biggest mistake that the retail investor or trader is making these days?

Carley Garner: The biggest mistake is underestimating the volatility, and I’ll be 100% honest: We learned a tough lesson last month, in the gold market. In my wildest dreams, I never expected option volatility to get to the level that it did, and it clearly did, and it did quickly. So you really have to respect the markets.

When you’re talking about the VIX over 40, or even ignoring the VIX, and talking about commodity markets that are just insanely volatile at historical levels, really be careful. Trading less is better than being caught on the wrong side of a move that quite frankly can rip your face off.

Kate Stalter: Last question for you then, to follow up on that. If you do find yourself caught on the wrong side of a trade, what should a trader do?

Carley Garner: It obviously depends on which strategy you’re using. It’s a lot different for an option trader, versus a scalper, or versus a position trader, but the bottom line is you want to live to trade another day. It’s never fun, and it’s never a good idea to risk it all on one trade.

Unfortunately, when you’re talking about markets that are moving like this, in this magnitude, I can imagine that a lot of traders out there almost didn’t have a choice. For example, anybody trading gold that was accustomed to…a year ago, if someone said gold moved $30 or $40, you would have said, “Wow, that’s a big day.”

But nowadays, you know $30 or $40 is nothing. It’s more like $60 or $90 a day. And that type of volatility for a small trader that wasn’t expecting things to change overnight, like they did, could have very easily ended painfully.

Kate Stalter: So maybe just in a word, caution?

Carley Garner: Exactly. Less is more; that’s really the bottom line. Don’t try to be a hero; don’t get too aggressive. Less is more.

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