ETF Trades: Cold Winter Could Heat Up Natural Gas
By: Christopher Mistal
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January 08, 2015
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Based upon the NYSE ARCA Natural Gas Index (XNG) there is a seasonal tendency for natural gas companies to enjoy gains from the end of February through the beginning of June. Detailed in the Stock Trader’s Almanac 2015 on page 94, this trade has returned 17.7%, 11.5%, and 9.8% on average over the past 15, 10, and 5 years respectively. Concurrent with this is a featured trade on page 32 of the Commodity Trader’s Almanac 2013 that is based upon natural gas, the commodity.

One of the factors for this seasonal price gain is consumption driven by demand for heating homes and businesses in the northern cold weather areas in the United States. In particular, when December and January are colder than normal, we see depletions in inventories through February. This has a tendency to cause price spikes lasting through mid-April. This was precisely the situation in December 2013 through February 2014 when natural gas rallied from around $3.75/mmBtu to nearly $6.00/mmBtu. 

A relatively mild start to winter this year combined with plunging crude oil prices has sent natural gas back below $3/mmBtu this week, even as many parts of the U.S. are unseasonably cold. Inventories are healthier now than a year ago, but are still below the 5-year average for this time of year. This combination of a recent sharp price decline and below average inventories represents an excellent opportunity for new long positions, especially with the coldest winter months still ahead.

[Natural Gas Weekly Bars (NG) and 1-Year Seasonal Pattern Since 1990]

First Trust ISE-Revere Natural Gas (FCG) is an excellent choice to gain exposure to the company side of the natural gas sector. FCG can be bought on dips below $10.03. Once purchased, use a stop loss of $9.04 and take profits at the auto sell, $12.99. Top five holdings by weighting as of yesterday’s close are: Talisman Energy, Matador Resources, SM Energy, Comstock Resources and Devon Energy. The net expense ratio is reasonable at 0.6% and the fund has approximately $215 million in assets.

[First Trust ISE-Revere Natural Gas (FCG) Daily Chart]

United States Natural Gas (UNG) is suggested to trade the commodity’s seasonality as its assets consist of natural gas futures contracts and is highly liquid with assets of nearly $700 million and average daily trading volume in excess of 10 million shares per day on average over the past three months. Its expense ratio is 1%. UNG could be bought on dips below $14.50. If purchased, set an initial stop loss at $13.12. Profits can be taken at the auto price of $18.77.

[United States Natural Gas (UNG) Daily Chart]

Portfolio Updates

Since last update in early December, the market is essentially flat including today’s solid gains. But, recent weakness and early December weakness did have an impact on the ETF Portfolio. PowerShares DB Agriculture (DBA) was stopped out on January 2 when it closed below its stop loss of $24.75. iShares DJ US Telecom (IYZ), iShares PHLX Semiconductor (SOXX) and Direxion Daily 20+ Year Treasury Bear 3x (TMV) were also stopped out in the first half of December. Telecom and Semiconductor seasonally favorable periods ended last month while 30-year Treasury bond weakness typically lasts until late April. Recent mixed signals from the Fed regarding interest rates makes shorting the long bond at this time too risky so no new TMV trade will be taken.

Per last month’s advice, SPDR Gold (GLD) was closed out of the portfolio using the closing price on December 4, for a modest 3.5% gain. This was a short-term trade targeting typical seasonal strength from mid-November to early December. GLD did trade modestly higher since, but is basically flat as of today.

Last month’s Seasonal Sector Trades focused on seasonal strength in copper and corn. iPath DJ-UBS Copper TR Sub-Index ETN (JJC) was added to the portfolio on December 15 and is currently down a little over 4%. Copper’s favorable period usually lasts until late February. JJC is on Hold. Teucrium Corn (CORN) never traded below its buy limit. This trade idea is being cancelled because strength typically fades in mid-January. 

Aside from today’s new trade ideas, this balance of the portfolio is on Hold. January has had a spotty record in recent years, S&P 500 has declined in eight of the last fifteen, and February’s longer-term track record makes it’s the weak link of the “Best Six/Eight Months.”  

[Almanac Investor ETF Portfolio – January 8, 2015 Closes]

Disclosure Note: At press time, officers of the Hirsch Organization, or accounts they control held positions in IBB, IWM, IYT, QQQ, SPY, UNG, VNQ, XLF, XLI and XLV.