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 2021 on page 92, this trade has returned 13.8%, 11.5%, and 19.3% on average over the past 15, 10, and 5 years respectively. Seasonal strength can be seen in the following chart, highlighted in yellow.
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.
Natural gas and crude oil prices both plummeted last year as the global pandemic significantly cut demand. Prices have recovered as lockdowns eased and economies have recovered, but not fully as the pandemic continues. As vaccine rollout accelerates, energy demand is also highly likely to improve. The increase in demand also appears it could arrive when supplies may be under pressure by a new administration in the White House and production cuts from OPEC.
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 $10.00. Once purchased, consider using an initial stop loss of $8.40 and take profits at the auto sell, $12.52. Top five holdings by weighting as of yesterday’s close are: Diamondback Energy, Devon Energy, Apache Corp, Occidental Petroleum and Hess. The net expense ratio is reasonable at 0.6% and the fund has approximately $117.7 million in assets.
Sector Rotation ETF Portfolio Update
Broad market strength in November and December has continued into the New Year and the overall Sector Rotation Portfolio has benefited nicely. Nearly every position in the portfolio is positive. The lone exception is iShares Silver (SLV). As is often the situation, the portfolio has its leaders and its laggards. Since our November 5 Seasonal Buy signal the best performing position has been SPDR Financials (XLF), up a solid 21.5%. iShares PHLX Semiconductor (SOXX), SPDR industrials (XLI) and SPDR Materials (XLB) are all up double-digits. Vanguard REIT (VNQ) is the laggard, up just 2.9% (excluding dividends and fees).
Last month’s Seasonal Sector Trades ideas targeting seasonal strength in copper have been added to the portfolio. United States Copper (CPER) and Global X Copper Miners (COPX) were added in mid-December when both broke out above projected monthly resistance. CPER and COPX are on Hold.
Last month’s trade aimed at oil stocks, SPDR Energy (XLE) has also been added to the portfolio. XLE is on Hold.
With the exception of the new trade idea, 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.
Tactical Seasonal Switching Strategy Portfolio Update
As of yesterday’s close, the Tactical Seasonal Switching Strategy portfolio has an average gain of 11.3% since our Seasonal Buy Signal. iShares Russell 2000 (IWM), is the top performing position in the basket, up a whopping 24.3%. After leading throughout the majority of 2020, Invescos QQQ (QQQ) is the laggard of the group, up just 5.1%. 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 next year after April 1. As a result, no stop loss is suggested on these positions.