#$fcg

Even though crude oil and natural gas stocks did not participate into today’s market rally, their recent run is likely to continue as seasonal strength in both typically lasts until late into the second quarter and beyond. Based upon research in the Stock Trader’s Almanac 2021, Sector Seasonality, found on pages 92 to 96, seasonal strength in the NYSE Arca Natural Gas Index (XNG) runs from the end of February until the beginning of June while strength in the NYSE ARCA Oil & Gas Index (XOI) runs from mid-December through the beginning of July. In recent years, ample supply, and depressed demand had keep prices largely in check and seasonal bullish moves were muted or even overridden by weak fundamental data.

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 2017 on page 94, this trade has returned 10.8%, 11.1%, and 3.8% on average over the past 15, 10, and 5 years respectively.

Natural Gas Futures (NG) also tend to surge off of a seasonal low point in late-February. In the chart below near term NG futures contracts are plotted in weekly candlesticks overlaid with the black XNG line. In the lower window the seasonal trend is highlighted.

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 depletions in inventories through late March and occasionally into early April. This has a tendency to cause price spikes lasting through mid-April. 

A relatively mild start to winter this year has kept natural gas prices in check right around $3.40/mmBtu as of today. Inventories are modestly lower now than a year ago and are slightly below the 5-year average for this time of year. Unseasonably warm weather in the Northeast now is not likely to last through the remainder of January and February.

Seasonally, July is a good month to get long natural gas ahead of its best five months, August through December. Buying the November natural gas futures on or about July 24 and holding until about October 21. In the past 25 years, this trade has worked 13 times, for a success rate of 52%. Mild winter weather and ample supplies have led to a glut in natural gas in recent years resulting in losses for this trade in seven of the last nine years. Approach this trade with caution.

This unique commodity has a dual demand season based on hot and cold weather temperatures. In the United States, natural gas, coal, and refined petroleum products are used as substitutes in electric power generation. Electric power generators switch back and forth, preferring to use whichever energy source is less expensive. Seasonal spikes in demand can be seen in the chart below, as increased summer electricity demands from air conditioning usually begins lifting prices in July and August. As the summer season exits, weather can still play a role in September, when hurricanes can and have threatened production in the Gulf of Mexico, as occurred with Hurricane Katrina.

From page 94 of Stock Trader’s Almanac 2015, the stocks of natural gas companies tend to make a significant seasonal bottom around the end of February. Depending upon winter weather and physical gas storage levels, the bottom has come sooner in some years and later in others. As one would expect, the seasonal bottom in natural gas companies often coincides with the seasonal bottom in the actual commodity.

Shaded in yellow in the above chart, you can see that since 1990, natural gas tends to trade sideways through February and much of March before rallying to a seasonal high in June. The reason for this rally is inventories need to be rebuilt following the high-demand winter period in preparation for power plant gas demand due to increased electricity requirements of summertime air conditioning.

OK, I can’t talk about the Santa Claus Rally, the first five days or the January Barometer anymore for at least a few days. It’s been all over the financial media ad nauseaum and we have talked about it more than enough in this space. As we get closer to month-end and we have a clearer picture of how this volatile month should pan out, then we can revisit these topics.

I love going on BNN (Business News Network, Canada’s only all business and financial news channel) and chatting with anchor Frances Horodelski. We covered quite a bit in today’s clip below, including the upcoming natural gas seasonal trade setup.

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 2015 on page 94, this trade has returned 17.7%, 11.5%, and 9.8% on average over the past 15, 10, and 5 years respectively. Concurrent with this is a featured trade on page 32 of the Commodity Trader’s Almanac 2013 that is based upon natural gas, the commodity. 

Last month we featured our late-July to October seasonal trade on Natural Gas well in advance of the usual seasonal low. Now that the nat gas season is underway, we have some solid technical indications that nat gas has bottomed and is ready to rally. In addition, geopolitical turmoil has put a floor in on energy, hurricane season is picking up and the air conditioners are cranking as the summer heats up.

We believe a secular low in gas was made in the spring of 2012 just below $2 and that this recent low in the $3.50-$4.00 area is the new support zone. You can see in the graph below of nat gas futures and First Trust ISE-Revere Natural Gas (FCG) that gas is bottoming at this juncture rather in line with its seasonal trend, making for a nice setup. Other technical indicators (MACD, Stochastics and Relative Strength) have all turned positive. Plus, the COT report shows the commercial hedgers, the “insiders”, getting longer in recent weeks.

So with the fundamental story for gas strong, as the most accessible clean energy, lining up with a strong seasonality and compelling technical picture, we like three ETFs that take advantage of the bullish environment in natural gas. FCG mentioned above is a basket of the top pure nat gas explorers and producers. United States Natural Gas (UNG) is a futures-based ETF that holds near term futures contracts and tracks nat gas prices to a “T”. And Energy Select Sector SPDR (XLE) holds all the big oil and gas energy names.

Disclosure Note: At press time, officers of the Hirsch Organization, or accounts they control held positions in FCG, UNG, and XLE.

Late-month July declines turned the month negative and snapped a five-month winning streak for DJIA and S&P 500. In July DJIA fell 1.6%, S&P 500 1.5%, NASDAQ 0.9%, and Russell 2000 shed a whopping 6.1%. You have to go back to May 2012 to find a worse month for small-caps. At the end of July, DJIA and Russell 2000 were once again negative year-to-date while S&P 500 and NASDAQ were still up 4.5% and 4.6% respectively. Weakness was broad based with 27 of 29 sectors tracked posting declines in July. The Bear/Short and Telecom sectors were the only advancers.

Worst performing Almanac Investor ETF sectors in July were: Energy (–6.1%), Utilities (–5.6%), Small/Micro Cap (–4.8%), Semiconductors (–4.5%) and Leveraged Long (–4.0%). Year-to-date, three sectors are now negative: Bear/Short, Small/Micro Cap and Consumer. iShares DJ U.S. Home Construction (ITB) is the only ETF from these year-to-date negative sectors to appear on the 1-Month Losers list. Aside from home builders, ITB also holds positions in Lowes (LOW) and Home Depot (HD). All have struggled this year as the housing recovery has slowed. United States Natural Gas (UNG) and First Trust ISE-Revere Natural Gas (FCG) were the biggest losers in July, off 14.2% and 12.1% respectively. Both were added to the Almanac Investor ETF Portfolio just above current levels. Corn, solar, Russian and India small-caps and a thinly traded Target Date fund rounded out July’s Losers list. All were double-digit losers.