Seasonal Sector Trades: Stocks Fizzle & Natural Gas Sizzles By: By Christopher Mistal & Jeffrey A. Hirsch | July 09, 2015 | Email | Print

Selling the September S&P 500 futures contract on or about July 15 and holding until on or about July 24 has a 60.6% success rate registering 20 wins against 13 losses in the last 33 years. The best win was $19,150 in 2002, and the worst loss was in 2009, posting a $12,650 bereavement. This trade had been successful in 13 of 15 years from 1990 to 2004. However since then it has nearly the opposite record, posting losses in eight of the last ten years. In these recent years, weakness did materialize however, it was not perfectly aligned with the window defined b this trade. In some years weakness arrived early and was fleeting wile in other years it was later and lasted into the early part of August. This year the setup is compelling as the market has is already struggling during its typically seasonally favorable first half of July. 

 

 

Looking at the chart above, you will see the average price tendency is for a summer sell-off that usually begins in mid-July and lasts until mid-October. Part of the reason is perhaps due to the fact that July starts the worst four months of the year for NASDAQ and also falls in the middle of the worst six months for DJIA and S&P 500. Mid-July is also when we typically kick off earnings season, where a strong early month rally can fade, as active traders may have “bought the rumor” or bought ahead on anticipation of good earnings expectations and then turn around and “sell the fact” once the news hits the street.

 

For the Almanac Investor ETF Portfolio, our top choice to execute a trade based upon this seasonality is ProShares UltraShort S&P 500 (SDS). This trade is not for the faint at heart or those without the desire or ability to routinely monitor as SDS is leveraged two times the daily move of the S&P 500. This relationship can be seen in the following chart comparing SDPR S&P 500 (SPY) (daily bars) to SDS (solid black line). We will add SDS to the ETF Portfolio if SPY breaks down below its projected monthly support (green dashed line) at $203.25 or near monthly resistance (red dashed line) at $210.56. Once added to the ETF Portfolio, a 5% trailing stop loss, based upon daily closing prices of SDS, is suggested.  

 

 

 

Seasonally, July is a good month to get long natural gas ahead of its best five months, August through December. Buying the November natural gas futures on or about July 24 and holding until about October 21. In the past 25 years, this trade has worked 13 times, for a success rate of 52%. Mild winter weather and ample supplies have led to a glut in natural gas in recent years resulting in losses for this trade in seven of the last nine years. Approach this trade with caution.

 

 

This unique commodity has a dual demand season based on hot and cold weather temperatures. In the United States, natural gas, coal, and refined petroleum products are used as substitutes in electric power generation. Electric power generators switch back and forth, preferring to use whichever energy source is less expensive. Seasonal spikes in demand can be seen in the chart below, as increased summer electricity demands from air conditioning usually begins lifting prices in July and August. As the summer season exits, weather can still play a role in September, when hurricanes can and have threatened production in the Gulf of Mexico, as occurred with Hurricane Katrina.

 

 

Besides options on futures, traders can take advantage of these seasonal price moves with United States Natural Gas (UNG), a futures based ETF, or an ETF that owns the stocks of companies that find, produce, develop, and distribute natural gas like First Trust ISE-Revere Natural Gas (FCG). After surging at different times earlier this year and subsequently retreating, UNG and FCG are attractive near current levels. UNG can be considered on dips below $12.15 (stop loss $10.94) and FCG on dips below $8.20 (stop loss $7.40). UNG and FCG will be tracked in the ETF Portfolio.