ETF Trades: Looking for Additional Natural Gas Gains By: Jeffrey A. Hirsch & Christopher Mistal | January 07, 2016 | Email | Print

Famous financier and fund manager George Soros came out today with his outlook that this year is in store for a meltdown and financial crisis like 2008, mostly triggered by a Chinese economic and market collapse. Dr. Doom, Marc Faber, was also awoken from his slumber in the middle of the night in his residence in Thailand to espouse his bearish outlook – the same one he has had since about 2010. 

 

Both gentlemen are giants in the field and brilliant analysts who we respect greatly, but so many folks are now jumping into the bear camp that the complacency that was prevalent in January 2008 is not quite as present here in January 2016. Don’t get us wrong, there are many troubling factors and indications presenting themselves at the moment, but we are not convinced we will experience another generational bear market so soon. A tamer bear market is however, not out of the question.

 

So we took a look back at our commentaries and market action back in 2008 to compare and contrast it to the market here in 2016. There are similarities and differences. Market sentiment feels a little more bearish now. CBOE Equity only put/call ratio was more fearful in 2008, but there is more bearish advisors here in 2016. As you can see in the chart, S&P 500 was down much more and much faster in 2008 than now. 

 

Caution is definitely in order now, but so is patience. Let’s wait and see what the full-month January Barometer tells us before throwing in the towel.

 

 

 

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 2016 on page 94, this trade has returned 15.1%, 11.8%, and 3.4% 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, itself.

 

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 late March and occasionally into early April. This has a tendency to cause price spikes lasting through mid-April.

 

A relatively mild start to winter this year combined with plunging crude oil prices had sent natural gas back below $2/mmBtu in mid-December. Since then it has enjoyed a nice rally back to just under $2.50/mmBtu. Inventories are healthier now than a year ago and are still slightly above the 5-year average for this time of year, but have declined rather briskly in recent weeks. With more cold weather in the forecast and the most of January and February yet to come, further upside potential for natural gas and possibly natural gas company stocks seems plausible. 

 

 

First Trust ISE-Revere Natural Gas (FCG) is an excellent choice to gain exposure to the company side of the natural gas sector. FCG could be bought on dips below $3.75. Once purchased, use a stop loss of $3.65 and take profits at the auto sell, $3.75. Top five holdings by weighting as of yesterday’s close are: EXCO Resources, Southwestern Energy, Chesapeake Energy, Rice Energy and Gulfport Energy. The net expense ratio is reasonable at 0.6% and the fund has approximately $135 million in assets.

 

 

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 $500 million and average daily trading volume in excess of 6 million shares per day on average over the past three months. Its expense ratio is 1.14%. UNG could be bought on dips below $8.40. If purchased, set an initial stop loss at $7.90. 

 

 

 

Since last update in early December, the market and the ETF Portfolio have weakened substantially. As a result, positions in iShares DJ Transports (IYT) and SPDR Energy (XLE) have been stopped out. Additionally, today’s losses have triggered stop loss sales of SPDR Materials (XLB) and iShares Russell 2000 (IWM). XLB and IWM will be officially closed out of the portfolio in the next update.

 

As a reminder, three favorable sector seasonalities usually come to an end in January; High-Tech, Computer Tech and Pharmaceutical. High-Tech and Computer Tech resume favorable seasonalities again in March and April respectively. With this in mind and the magnitude of recent declines considered, corresponding positions in IYW and XLK are on Hold. Due to the increasingly blurry line between Healthcare, Biotech and Pharmaceutical sectors, no one specific ETF was selected to trade just Pharmaceutical strength last September. Instead we elected to purchase XLV and IBB, both of which have longer lasting favorable periods and are on Hold. 

 

With the exception of today’s two new trade ideas, all positions in the portfolio are on Hold.