ETF Trades & Updates: Natural Gas Pullback Appealing By: Christopher Mistal | February 06, 2025 | Email | Print

For those who were unable to attend the member’s only webinar on Wednesday, the slides and video recording are available here (or copy and paste in a new browser window: https://www.stocktradersalmanac.com/LandingPages/webinar-archive.aspx). Jeff kicked off the webinar with a review and reminder of post-election year historical trends and patterns. Important takeaways from the webinar included: the market is tracking historical patterns and Q1 in post-election years tends to be mixed and choppy. He also reiterated that the current market chop was expected and is likely to continue as the new administration is wasting no time rolling out a myriad of policy initiatives and changes. 

 

After a quick review of market breadth data, Jeff then noted the absence of the typical “January Effect” of small-cap stock outperformance is a concern. Small caps have historically done well in February, but not as well in post-election year Februarys. Should the market begin to retreat in February, key levels of support for S&P 500 and NASDAQ are around their respective Election Day gaps and last summer’s highs (slides 15 & 16).

 

Next topics covered included the retreating 10-year Treasury bond yield, most likely due to slowing economic growth, based upon initial Q4 GDP, as employment data appears to be holding up while inflation remains stubbornly above 2%. The next Fed rate cut is not likely until June, barring any major change in the data. Bitcoin’s seasonal pattern and historical Q1 strength were then covered before moving onto quick looks of gold, crude oil, and natural gas technicals.

 

 

In addition to all of our numerous January indicators, the clearest reason why we place such importance on January is the fact that no other month in the year exhibits as much outperformance when the month is up versus when the month is down over the following 11-months and 12-months. Since 1938, when the S&P 500 was up in January, the next 11-months average a gain of 11.8%. When January is down, the next 11-months average plummets to just 1.2%. Years with a positive January have historically outperformed a down January by 10.6%. Over the following 12 months, the outperformance grew to 11.3%. 

 

As you can see from the following bar chart, no other month comes close to the improvement in subsequent performance when the month is up versus when the month is down. We are sticking to our Base Case scenario from our 2025 Annual Forecast for average full-year gains of 8-12% with chop and weakness continuing in Q1 and likely again sometime during Q3.

 

 

 

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 2025 on page 94, this trade has returned 17.80%, 18.00%, and 19.09% on average over the past 25, 10, and 5 years respectively. Natural gas seasonal strength, the underlying commodity that drives shares of companies that comprise XNG, 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 can result in price spikes lasting through mid-April and beyond. Crude oil also tends to rise during this timeframe in anticipation of the summer driving season and many of the companies also have exposure to crude oil.

 

Here in the Northeast, just outside of New York City, it certainly feels like winter has been colder than average thus far this year. Even though we have not seen substantial amounts of snow, there have been many days below freezing. The cold weather has increased demand for natural gas and inventories are now modestly below average when compared to the past five years. Beyond the near-term, natural gas demand is likely to grow as the new administration has resumed export permit processing for new liquified natural gas projects. Tariffs could impact exports, but the impact is likely to be limited to a small number of countries. 

 

First Trust Natural Gas (FCG) is our top choice to gain exposure to the company side of the natural gas sector. FCG could be considered on dips below a buy limit of $24.54. Once purchased, consider using an initial stop loss of $21.33 and taking profits at the auto-sell price, $31.80. 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 10% added. Additionally, should FCG reach the auto-sell, a tight trailing stop could be used in lieu of an outright sell. 

 

The top five holdings by weightings as of yesterday’s close are: Hess Midstream, Western Midstream, EQT Corporation, ConocoPhillips, and Occidental Petroleum. The net expense ratio is reasonable at 0.6% and the fund has approximately $442.3 million in assets. For tracking purposes, we will add FCG to the Sector Rotation ETF portfolio if it trades below its buy limit.

 

 

 

No sector seasonalities are scheduled to end during February. iShares Semiconductor (SOXX) is still on Hold, even though its historically seasonally favorable period ended in December. SOXX had broken out of its nearly 3-month long trading range in January and was nearly back to break even when it was crushed by news of DeepSeek. Strong support does appear to be right around its stop loss of $210.52. DeepSeek did trigger and expand AI discussions, but AI is here and is not likely to continue to advance without further research, development, and sales from the companies held in SOXX.

 

Per last month’s update, new positions have been established in SPDR Materials (XLB), Global X Copper Miners (COPX), SPDR Energy (XLE) and S&P Oil and Gas Equipment & Services (XES). All four positions were modestly positive at yesterday’s close. XLB, COPX, XLE and XES can all still be considered below their respective buy limit prices.

 

Other holdings in the Sector Rotation portfolio have a wide performance variation, but most have improved since our early January update. Excluding iShares Bitcoin (IBIT), SPDR Consumer Discretionary (XLY) is the best performer, up 16.3% as of its February 5, close. It would appear “never bet against the consumer” remains true to this day or at least as long as employment data and wages remain respectable. XLY is on Hold. iShares US Technology (IYW) is second best, up 12.1%. Most of this gain can be attributed to an earlier purchase as many of IYW’s holdings have retreated this year. IYW is on Hold.

 

With the 10-year Treasury bond yield retreating, SPDR Staples (XLP), SPDR Healthcare (XLV) and Vanguard REIT (VNQ) have been improving. Should rates continue to retreat, XLP, XLV and VNQ could easily continue to improve. XLP, XLV, and VNQ can be considered at current levels or on dips.  

 

In anticipation of some seasonal weakness in February, most likely beginning after mid-month and/or Presidents’ Day, many positions in the Sector Rotation portfolio can be considered on dips below their respective buy limits in the table below. This applies if you do not have an existing position(s) or if you are looking to add to an existing position(s).

 

Please note some stop losses have been adjusted to account for recent gains.

 

 

 

 

Positions in the Tactical Seasonal Switching Strategy portfolio are now up 4.4% on average as of the close on February 5 compared to 1.0% on January 8. All four positions improved led by SPDR DJIA (DIA) as it swung from a mild loss of 0.9% to a 4.5% gain. At just over halfway through the Best Six Months for DJIA and S&P 500 and not even halfway through NASDAQ’s Best Eight Months, performance thus far is in line with historical average performance. All positions in the Tactical Seasonal Switching portfolio can be considered on dips if you do not have a position or are looking to add to an existing position. Please see the table below for suggested buy limits.