Market Update & ETF Trades: Natural Gas Setting Up for Seasonal Rise By: Jeffrey A. Hirsch & Christopher Mistal | January 05, 2023 | Email | Print

Back in January 2013, we combined the Santa Claus Rally with the First Five Days (FFD) Early Warning System (page 16, STA 2023) and our January Barometer to create our “January Indicator Trifecta.” While the SCR gain is constructive, a positive FFD and JB will add more support to our bullish outlook for 2023. As we detailed in yesterday’s Alert, when all three indicators were positive, the full year was positive 28 of 31 times (90.3% of the time) with an average gain of 17.5% in all years. 

 

As you can see in the table below, two out of three ain’t bad either. Years when SCR is up and one of the other Trifecta indicators are also positive have done much better than when a positive SCR is followed by negative readings for both the FFD and full-month JB. 2022 was a case in point. Of the nine years SCR was up and both FFD and JB were down, only one year was up and the average loss was -10.5%. When SCR is up and one of the others is also up 14 of the 18 full years were also up for an average gain of 7.9%. As you might expect, results are better when the January Barometer is the one that’s up.

 

 

As we all continue to plan for 2023, let’s continue to use history as our guide. Last year was a textbook midterm year bear market with a quintessential October bottom. (We discussed this early and often throughout 2022. Check the archives.) True NASDAQ made a new closing low in December, but the October intraday low held. And so far DJIA, S&P 500 and Russell 2000 have held their October lows. In fact, the R2K held its June low, which we find constructive.

 

As we discussed in our 2023 outlook here last month and in the 2023 STA outlook on pages 10-11 (and page 34), this midterm year bear market decline sets up the “Sweet Spot of the 4-Year Cycle” from Q4 midterm year to Q2 pre-election year. Pre-election years like 2023 are the best year of the 4-Year Cycle. The chart of pre-election years in the STA 2023 and in our outlook last month paints a rather bullish picture with gains ranging from 12.3% for our Aggregate Cycle of the One-Year Seasonal Pattern, the 4-Year Presidential Election Cycle and the Decennial Cycle to 20.3% for Pre-Election Years after a midterm bear market.

 

Yes, the market still faces several headwinds. While it appears inflation has peaked and is rolling over, it is only just beginning to hit Main Street pocketbooks and prices at the grocery store and elsewhere are not likely to come down quickly. We expect the Fed to be done raising rates in Q1, but expect rates to remain at these levels for some time. Then there is war in Ukraine, which we suspect will drag on into Cold War 2.0. Supply chain issues linger and we are concerned about the covid outbreak in China and how that could further impact supply chains and demand.

 

But there are tailwinds as well. With so many bears growling recession and meltdowns on The Street, mainstream media and social media our contrary antennae are purring louder and louder. Markets notoriously climb these walls of worry. While rates have risen dramatically over the past year, they remain relatively low when compared to the peak in the early 80s. Prices are up, but inflation is coming down. 

 

GDP remains robust and the incredibly accurate Atlanta Fed GDPNow estimate is for 3.8% growth in 2022 Q4. While the strong labor market freaked the market out today, a strong labor market is indicative of a healthy economy. Also, our good friend Sam Stovall and his team over at CFRA Research are projecting the earnings recession to end in 2023 Q2. Markets usually bottom six months or so ahead of that. 

 

Remember, we are not permabulls. Last year at this time we were rather cautious as most others were not, and quickly turned more bearish as our January Trifecta went negative and readings from the other Seasonal, Fundamental, Technical, Monetary and Sentiment indicators we follow continued to deteriorate. We continue to expect choppy market action through the first quarter and then rather typical Pre-Election Year bullish action on the heels of the midterm bear market and the markets losses last year.

 

 

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 2023 on page 94, this trade has returned 16.5%, 13.6%, and 12.4% on average over the past 25, 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 tends to rise during this timeframe in anticipation of the summer driving season.

 

Last year natural gas surged in response to firm domestic demand and Russia’s invasion of Ukraine. After peaking in late-August/early September, natural gas has been declining and is currently at nearly the same price it was one year ago. Much of the retreat appears to be due to nearly everyone expecting the Fed’s rate hikes to push the U.S. into recession. Perhaps the Fed will, but it just doesn’t look that way now. U.S. GDP is holding up and the labor market is still firm. The tech sector is cutting back, but in all reality many of them probably did get carried away during the peak of “work from home.” If natural gas and crude oil are currently priced for a recession and the recession does not come, prices for both are likely to surge higher as supplies are still broadly restricted.

 

First Trust Natural Gas (FCG) is an excellent choice to gain exposure to the company side of the natural gas sector. FCG could be considered on dips below a buy limit of $23.00. Once purchased, consider using an initial stop loss of $20.07 and take profits at the auto sell, $32.15. As a reminder the auto sell price is based upon FCG’s buy limit plus the sector’s average price return over the last 25 years with an additional 20% added. Top five holdings by weighting as of yesterday’s close are: DCP Midstream, Hess Midstream, Western Midstream, ConocoPhillips and Pioneer Natural Resources. The net expense ratio is reasonable at 0.6% and the fund has approximately $821.4 million in assets.

 

 

 

Santa Claus did pay a visit to Wall Street this year and our Santa Claus Rally was positive, but the market is still in a Fed induced funk. Typical second half of December market strength did not materialize, instead recessions fears dragged major indexes lower with tech broadly leading the way down. Broad weakness did weigh on the positions in the Sector Rotation portfolio, but many sectors are still holding onto double-digit gains accumulated since our early October Seasonal MACD Buy signal and all open positions are still up 6.2% on average excluding dividends and any trading fees.

 

SPDR Consumer Discretionary (XLY) was stopped out on December 28. A quick review of XLY’s holdings reveals why. Its top holding is Amazon, and its third largest holding is Tesla. Both Amazon and Tesla suffered sizable declines in December dragging the entire ETF lower. For now, we will move on from XLY.

 

At the start of December iShares DJ US Telecom (IYZ) was rallying with the rest of the market and we elected to hold the position even though its historically favorable season typically ends in late December. With IYZ up 7.6% as of its close on January 4, which is much better than its recent historical performance, we are going to close out IYZ. Sell IYZ. For tracking purposes IYZ will be closed out of the portfolio using its average price on Friday, January 6.

 

All other positions in the portfolio are currently on Hold. Many positions have held gains and the broad market is still searching for direction. Please see table for suggested stop losses.

 

 

 

As of yesterday’s close, the Tactical Seasonal Switching Strategy portfolio had an average gain of 2.2% since our Seasonal Buy Signal. Invescos QQQ (QQQ) is once again in the red, down 5%. SPDR DJIA (DIA) is still the best performing position, up 10.2% while iShares Russell 2000 (IWM) SPDR S&P 500 (SPY) were still slightly in the green. 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.