ETF Trades: Winter Weather Drives Natural Gas Prices By: Christopher Mistal | January 12, 2017 | Email | Print

This year will be the 20th year that the stock market is closed to honor Dr. King and his contributions to the world and civil rights. Martin Luther King, Jr. Day has only been observed since 1998 and market behavior around this holiday has not been added to the Stock Trader’s Almanac yet. So I wanted to share with you the history of market performance around this holiday.

 

Overall the market has been more positive, on average, on the Friday before MLK day and weaker the Tuesday after. Though trading is rather mixed with a relatively even split of ups and downs on the day before and the day after. This mixed and choppy performance is possibly due to the fact that MLK day can either land in options expiration week or the week after. Both weeks have been rather volatile and weak since 1999.

 

 

 

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 2017 on page 94, this trade has returned 10.8%, 11.1%, and 3.8% on average over the past 15, 10, and 5 years respectively.

 

One of the factors for this seasonal price gain is consumption driven by demand for heating homes and businesses in the cold weather northern 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 has kept natural gas prices in check right around $3.30/mmBtu as of today. Inventories are modestly lower now than a year ago and are slightly below the 5-year average for this time of year. Unseasonably warm weather in the Northeast now is not likely to last through the remainder of January and February. 

 

 

First Trust 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 $26.00. Once purchased, use a stop loss of $23.40 and take profits at the auto sell, $31.69. Top five holdings by weighting as of yesterday’s close are: Anadarko Petroleum, Devon Energy, Concho Resources, Cimarex Energy and Noble Energy. The net expense ratio is reasonable at 0.6% and the fund has approximately $245 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 over $500 million and average daily trading volume in excess of 15 million shares per day on average over the past three months. Its expense ratio is 1.27%. UNG could be bought on dips below $8.10. If purchased, set an initial stop loss at $7.29. 

 

 

 

Since last update in mid-December, the market and the ETF Portfolio have essentially traded sideways. NASDAQ and technology related sectors have made the most progress and this is reflected in modest gains by IYW, XLK and QQQ. However, the mixed, choppy performance did allow the addition of Global X Copper Miners (COPX) when it dipped below its buy limit for the first time on December 15. As of yesterday’s close, COPX was up 5.8% and enjoyed additional gains today.

 

Per Tuesday’s Alert, ProShares UltraPro Short S&P 500 (SPXU) and ProShares UltraShort S&P 500 (SDS) were added to the portfolio using that day’s closing prices. Better pricing was available on Wednesday and the market showed initial signs of mid-January weakness today. SPXU and SDS are currently on Hold. Option expiration week, next week, and the week after options expiration has been volatile and weak recently. Should this trend continue this year, SPXU and SDS could provide a nice quick gain.

 

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, 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 which has a longer favorable period and is on Hold. XLV has been under pressure, but somehow I don’t think the new administration will be any more successful at controlling rising healthcare costs than any of the previous.