Tag: event risk
Value Stocks And Event Risk When Trading ETFs and ETNs
Today I had a cup of coffee, some oats and orange juice for breakfast.
And you know what?
Outside of this being a nutritious meal these are tradable assets.
They can either be traded as value stocks on the futures market or through the equity markets, via ETFs and ETNs.
Commodities are called “hard assets” and are typically categorized in these groups: Softs, Meats, Grains, Metals and Energies.
Softs: cotton, orange juice, sugar, cocoa and cotton.
Meats: live cattle, feeder cattle and lean hogs. 
Grains: wheat, corn, soybeans, soybean meal, soybean oil, oats and rough rice.
Energy: crude oil, brent crude, heating oil, gasoline, natural gas and ethanol.
Metals: gold, silver, copper, platinum and palladium.
Commodity prices are driven by the forces of supply and demand. We can also say that they’re hedges against inflation when trading value stocks. During periods of inflation, commodities help preserve purchasing power.
Now, if you decide on trading ETFs or ETNs on these hard assets… it’s important that you become familiar with the event risks involved. Of course, it’s not a one size 
fits all type of thing, so let’s take a look at some of the event risks that traders should think about when trading value stocks in commodity ETFs or ETNs.
Event Risk #1: Weather
As mentioned earlier, commodity prices are driven by supply and demand forces. Of course, weather can play a major role. For example, floods in India could affect cotton supply (one of the world’s largest producers) and cause prices to shoot up. Bad weather has the potential to cause supply disruptions. In 2005, Hurricane Katrina caused damage to U.S. oil refineries in the Gulf of Mexico…causing crude oil prices to skyrocket.
Event Risk #2: Economics & Policy with Value Stocks
During periods of fear…investors will get out of risky assets, like stocks, and flock towards “safe havens” like bonds and gold. In 2011, Gold hit a record high because of fears that the European debt crisis would create massive inflation. Gold is very unique in that is seen as a hedge against inflation as well as a safe haven. Silver on the other hand, does not have that distinction.
Always ask yourself what things mean in terms of supply and demand. For example, let’s say that China’s economy is showing signs of slowing down. What do you think that’s going to do the price of crude oil? This will most likey cause prices to shift sideways or down.
With that said, one of the key tools that central banks have is the ability to make changes to interest rates. Policy changes can affect commodities and stocks greatly if they’re not anticipated by the markets. Generally, central banks will try to prepare markets before they make significant changes to key interest rates in value stocks.
Event Risk #3: Geopolitical Risk
Commodities are natural resources…their prices are vulnerable to shocks…especially in countries in which they’re large suppliers or consumers of the product.
For example, back in March of 2104, Brent Crude oil prices spiked because of fear that Russia’s Vladimir Putin might cut gas flow. In May of 2014, Crude oil prices traded above $100 per barrel…due to concerns of tensions escalating in the Ukraine.
Summary
Now, if you’re trading value stocks that are highly correlated to commodities it’s important to be aware of the added volatility. For example, if the FOMC has a meeting announcement, it shouldn’t be a big surprise to see greater volatility in gold miners or gold ETFs. With that said, if there is uncertainty leading up to the event, it might make sense to lighten up your position or even hedge.
Stock Analysis And Event Risk In Equities
Imagine being long shares of a clothing retailer because you liked the short-term price pattern and felt that it was poised to break-out after some stock analysis. The following day one of its competitors had disappointing earnings and both stocks took a hit towards the downside.
Now, had you known how closely correlated both stocks were, and that one of them had earnings, you might have lightened up on your position or closed it out because you felt that earnings are a 50/50 coin toss.
In any event, a situation like this could have easily been avoided if you had just done your homework, i.e., better stock analysis. However, for the novice trader, these are scenarios that don’t even cross their mind. With that said, there are certain events that you need to be aware of before you decide to hold onto a position.
Let’s take a look at some of them.
Earnings
Many trading platforms today will have notifications on when earnings are. However, if yours doesn’t, it’s not the end of the world because that information is rather easy to find when doing stock analysis. For example, let’s say you took a long position in Gap Stores on November 5th and were considering holding it long for awhile. You could go to finviz.com and find their earnings information on their site.
(source: finviz.com)
As you can see, they have earnings on November 17. With that in mind, you’ll have to ask yourself if that can interfere with your thesis or not. In addition, you should also confirm by going to the company website and checking out their investor relations page.
(source: www.gapinc.com)
Generally, the company website is the most reliable source for dates such as earnings when conducting stock analysis.
Competitor Earnings
In some niche industries, how a competitor does on earnings could be an indication on how others in the same space might perform. In this case, the clothing retailers industry is one of those niche industries.
What you’ll need to do is look up the dates of competitors to see if they have earnings around the period you intend on holding your position. You can find a list of similar companies on finviz.com. For example, The Gap, Inc. is categorized as an Apparel Store.
By clicking on the apparel store link, a list of apparel stores will come up.
(source: finviz.com)
You’d simply sift through the ones that are similar to see if any of them have earnings coming up.
Industry Reports
Sticking with our example, some clothing retailers will share numbers ahead of earnings, like holiday sales numbers or even give out forecasts. Now, if you’re trading energy related stocks, you’ll want to be aware of the EIA Petroleum Status Report which is generally on Wednesday.
Economic Reports
If you’re trading home builders you want to know when new home sales are released. If you’re trading banking or gold mining stocks, you want to be aware when the FOMC or other central banks have meetings lined up. A basic economic calendar can be used to find this information out. For example, econoday.com does a nice job of laying out this information.
(source: www.econoday.com)
In summary, risk can be mitigated by simply making yourself aware of the events surrounding the stocks you’re trading. Of course, somethings we can’t predict, like when an analyst upgrades or downgrades a stock. But if it’s a known event, be ready and act accordingly after conducting stock analysis.