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 2022 on page 94, 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 can 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.
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 near current levels with a buy limit of $19.75. Once purchased, consider using an initial stop loss of $17.78 and take profits at the auto sell, $26.97. As a reminder the auto sell price is based upon FCG’s buy limit plus the sector’s average price return over the last 15 years with an additional 20% added. Top five holdings by weighting as of yesterday’s close are: Western Midstream Partners, ConocoPhillips, DCP Midstream, Occidental Petroleum and EOG Resources. The net expense ratio is reasonable at 0.6% and the fund has approximately $508.8 million in assets.
Sector Rotation ETF Portfolio Update
Broad market strength in late-December did continue into the New Year but proved short-lived as Fed Minutes released last week revealed the Fed was ready to be more aggressive in its efforts to control inflation. A quicker end to QE and a brisker rate hike cycle is something the market apparently is still struggling to come to terms with. Thus far, growth stocks and small caps have been hit the hardest. Many positions in the Sector Rotation portfolio are off of their respective recent highs, but with the exception of SPDR S&P Biotech (XBI) every open position in the portfolio is positive.
Today XBI closed below its suggested stop loss. Instead of closing out the position we are going to officially add to the existing position. New purchases of XBI can be considered up to a buy limit of $100.00. We intend to make XBI a core holding in the portfolio and will continue to accumulate on dips. For tracking purposes, we will add to the existing XBI position using its average price on January 14.
Per the December 2 update, iShares DJ US Telecom (IYZ) was sold and closed out of the portfolio using its average price on December 3 of $31.16. Telecom’s seasonally favorable period has historically ended in December and IYZ’s failure to deliver heading into to December were the reasons for its sale.
November’s Seasonal Sector Trades ideas targeting seasonal strength in copper now appear in the portfolio. United States Copper (CPER) and Global X Copper Miners (COPX) were added in mid-November. CPER and COPX are on Hold.
With the exception of FCG and XBI, all other positions in the portfolio are currently on Hold. Many positions have enjoyed respectable gains and the broad market is in a seasonally soft patch that can last from now into 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 had an average gain of 4.2% since our Seasonal Buy Signal. SPDR S&P 500 (SPY) was the top performing position in the basket, up a solid 7.7%. Second place belonged to Invescos QQQ (QQQ), up 7.4% while iShares Russell 2000 (IWM) is the laggard of the bunch, down 2.7%. 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.