ETF Trades: Colder Temps Could Boost Natural Gas
By: Christopher Mistal
January 10, 2019
As of today’s close, DJIA is up 2.9% year-to-date, S&P 500 is up 3.6% and NASDAQ is up 5.3%. Not bad for today being just the seventh trading day of the year. Even more impressive are the gains from since the closing low on December 24th. DJIA and S&P 500 are up over 10% and NASDAQ is up 12.8%. These gains combined with a trend of reduced market volatility suggest the worst of the market’s rout could be over and a return to more typical market behavior during the “Best Months” is underway. 
[DJIA Daily Bar Chart]
[S&P 500 Daily Bar Chart]
[NASDAQ Daily Bar Chart]
Technically, much damage still remains on the charts of DJIA, S&P 500 and NASDAQ, but some healing has taken place. DJIA, S&P 500 and NASDAQ have all rebounded back above support that we put around the old lows from earlier in the first quarter of 2018. The next hurdle will be climbing back above respective 50-day moving averages (magenta solid lines) and eventually back above 200-day moving averages (red solid line). NASDAQ is closest to its 50-day moving average and has been leading the move higher. If NASDAQ breaks through its 50-day moving average, then S&P 500 and DJIA are likely to follow.
January Trade Idea
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 2019 on page 92, this trade has returned 13.8%, 14.1%, and 15.6% 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 drawdowns in inventories through late March and occasionally into early April. This has a tendency to cause price spikes lasting through mid-April and beyond.
This winter got off to a slow start in the Northeast with relatively mild temperatures lasting until now, but the forecast appears to be changing with much colder temperatures appearing. Natural gas prices had spiked above $4.50/mmBtu back in November, but quickly retreated to under $3/mmBtu at the start of January. The situation appears to be setting up well for a rebound in natural gas and the stocks of companies that supply it.
[Natural Gas Weekly Bars (NG) and 1-Year Seasonal Pattern since 1990]
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 $16.65. Once purchased, consider using an initial stop loss of $15.40 and take profits at the auto sell, $21.17. Top five holdings by weighting as of yesterday’s close are: EQT Corp, Continental Resources, EnCana Corp, Devon Energy Corp and Cabot Oil & Gas Corp. The net expense ratio is reasonable at 0.6% and the fund has approximately $100 million in assets.
[First Trust Natural Gas (FCG) Daily Chart]
United States Natural Gas (UNG) could be considered to trade the commodity’s seasonality as its assets consist of natural gas futures contracts and is highly liquid with assets of nearly $300 million and trades millions of shares per day. Its total expense ratio is 1.30%. UNG could be bought on dips below $24.60. If purchased, set an initial stop loss at $22.76. 
[United States Natural Gas (UNG) Daily Chart]
ETF Portfolio Updates – Getting Back on the Horse
After the worst fourth quarter performance by S&P 500 since 2008 and the worst December since 1931, the Almanac Investor Sector Rotation Portfolio was completely wiped out. From S&P 500’s September closing high until its closing low on December 24, it declined 19.8%, just missing the widely utilized 20% decline that defines a bear market. A broad decline of that magnitude dragged all positions in the portfolio below their respective stop losses, even defensive positions like SPDR Healthcare (XLV) and SPDR Consumer Staples (XLP) were not spared.
December’s market rout is somewhat reminiscent of January 2016, only deeper. In February of 2016, recognizing that that sell off was likely overdone and global growth concerns were likely overblown we elected to jump back into positions and it paid off. With this in mind, along with the fact that the Best Six/Eight Months still have at least another three and five months to go respectively we are going to look to re-enter many of the positions that were stopped out. With the exception of Biotech, most favorable sector seasonalities continue until May, June or July. This window of time should provide ample opportunity for positions to recover and appreciate in price. Updated buy limits, stop losses and auto-sell prices can be found in the table below. Please note all buy limits are slightly below current levels.
[Almanac Investor Sector Rotation ETF Portfolio – January 9, 2019 Closes]
Tactical Switching Strategy Update
Our Tactical Seasonal Switching Strategy officially does not employ a stop loss (although we have utilized them in the past). As a result, the four positions held in the portfolio endured the wild ride down and are now recovering. Overall the portfolio is down 5.5% from our November 1 purchase date, but this is well above the lows. Now that the major indices have reclaimed their respective support levels and volatility appears to be cooling, we will look to add to our existing positions in DIA, IWM, QQQ and SPY at current prices or better. Buy limits appear in the following table.
[Almanac Investor Sector Rotation ETF Portfolio – January 9, 2019 Closes]