ETF Trades & Updates: Looking for a Seasonal Low from Natural Gas
By: Christopher Mistal
January 16, 2020
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 although the bulk of the move is usually complete in May. Detailed in the Stock Trader’s Almanac 2020 on page 92, this trade has returned 13.3%, 13.4%, and 16.9% on average over the past 15, 10, and 5 years respectively. This seasonal strength can be seen in the following chart, highlighted in yellow.
[XNG Weekly Bars (NG) and 1-Year Seasonal Pattern since 1990]
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. Crude oil also has a tendency to rise during this timeframe in anticipation of the summer driving season.  
This winter has gotten off to a slow start in the Northeast with relatively mild temperatures thus far, but the forecast appears to be changing with colder temperatures appearing. Natural gas has been falling since a brisk run-up in late-October/early November of last year and is now quickly approaching $2 per MMBtu. Inventories are plush and its price could still go lower yet, but $2 per MMBtu has been a price where past rallies have begun around. The situation appears to be setting up well for a rebound in natural gas and the stocks of companies that supply it.
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 $11.55. Once purchased, consider using an initial stop loss of $10.68 and take profits at the auto sell, $14.39. Top five holdings by weighting as of yesterday’s close are: Apache Corp, Concho Resources, Murphy Oil, Devon Energy and Cimarex Energy. The net expense ratio is reasonable at 0.6% and the fund has approximately $90 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 $500 million and trades millions of shares per day. Its total expense ratio is 1.28%. UNG could be bought on dips below $16.01. If purchased, set an initial stop loss at $14.81
[United States Natural Gas (UNG) Daily Chart]
Sector Rotation ETF Portfolio Update
Broad market strength in December has continued into the New Year and the overall Sector Rotation Portfolio has benefited nicely. Every position in the portfolio is now positive. As is often the situation, the portfolio has its leaders and its laggards. Since October the best performing positions have been technology related. iShares NASDAQ Biotech (IBB) is best, up 20.8% at yesterday’s close. iShares DJ US Tech (IYW), iShares PHLX Semiconductor (SOXX) and SPDR Technology (XLK) are notable standouts, all up over 16.5%. Laggards have been iShares DJ US Telecom (IYZ) and Vanguard REIT (VNQ). Both IYZ and VNQ are somewhat defensive in nature offering above average dividend yields.
Last month’s Seasonal Sector Trades ideas targeting seasonal strength in copper have been added to the portfolio list. United States Copper (CPER) was added in mid-December and is currently up 2.6%. Global X Copper Miners (COPX) has not yet traded below its buy limit. CPER and COPX can still be considered on dips below their respective buy limits.
Last month’s trade aimed at oil stocks, SPDR Energy (XLE) has also been added to the portfolio. For a brief moment it appeared as escalating tensions between the U.S. and Iran were going to kick off crude oil’s seasonally strong period early. However, tensions eased just as quickly as they rose and so did crude’s price and in turn the price of XLE. Energy has a history of volatility and is prone to spikes. XLE can still be considered on dips.
With the exception of recent trade ideas, all other positions in the portfolio are currently on Hold. Many positions have enjoyed solid gains and the broad market is headed toward a seasonally soft patch that can last from mid-January into early February. Please see table for updated buy limits and stop losses.
[Almanac Investor Sector Rotation ETF Portfolio – January 15, 2020 Closes]
Tactical Seasonal Switching Strategy Portfolio Update
Even though there is the possibility of some modest seasonal weakness later this month and in February, our overall outlook remains bullish for the Best Months. In the face of a Presidential impeachment trial, an ongoing trade war, seemingly endless Mideast tensions, and an upcoming election, the market and the U.S. economy has proven resilient. A phase one trade deal and an accommodative Fed are certainly helping. 
As of yesterday’s close, the Tactical Seasonal Switching Strategy portfolio has an average gain of 11.5% since our Seasonal Buy Signal. Invescos QQQ (QQQ) has reclaimed the top spot, up 15.2%. SPDR DJIA (DIA) is still the laggard. All positions in the portfolio are on Hold.
Please note, positions in the Tactical Switching Strategy portfolio are intended to be held until we issue corresponding Seasonal MACD Sell Signals after April 1. As a result, no stop loss is suggested on these positions.
[Almanac Investor Tactical Switching Strategy Portfolio – January 15, 2020 Closes]