Here’s a sector that may outperform this summer

Many stock sectors tend to – on average- take a bit of a breather in the summer. Exceptions to this seasonal tendency (its a tendency, not an absolute) to underperform are the lower beta sectors like consumer staples and utilities.  Particularly prone to underperformance in the summer are the growth sectors like consumer discretionary and technology. The commodity space, particularly crude oil, can also take a rest during the summer. Again, a tendency – NOT an absolute. Witness the recent performance of the AI/ Mag-7 stocks so far. However, the summer is young. And the tech sector is inarguably overbought and overvalued. So, anything can happen.

Today I’d like to look at one somewhat overlooked sector that has an interesting potential for profits if the seasonality lines up this summer. That sector is Natural Gas.

Natural Gas seasonality

Here’s a 10 year seasonality chart for the Nat Gas continuous futures contract – courtesy stockcharts.com. You can see that there are two standout months for this commodity. April has a history of Nat Gas outperforming the SPX (90%).  That outperformance gap being 9.4% higher than the index on average. If you look at the price chart closer to the bottom of this blog, you will see that once again, April (and May) was bullish for Gas.

The next favorable month for Gas is August. Meaning, if we are interested in the trade, we have a bit of time to position ourselves before that potential outperformance happens. Its been positive about 90% of the time, and has outperformed the SPX that month by about 10% on average. Keep in mind that outperformance is not net performance. AKA, if the SPX falls 20%, a 10% outperformance brings us to a negative 10% return on Gas in August, if it outperforms the SPX by 10%.

Now lets look at the technicals for Gas…

Natural Gas chart

A few observations on the chart below. First, note the very strong technical resistance at around $3.50. That may be a challenge to break. However, a breakout would be quite bullish both near-term and longer-term. The potential of that happening may be increased by the bullish divergence seen on MACD & RSI. Moneyflow momentum (MFI) is coming into an overbought level. One might see a bit of weakness before August if this signal proves correct.

 

Conclusion

One should never trade on a seasonal tendency alone. But the track record of Gas is pretty good in April and August, which should peak our interest. In my view, a brief pullback (MFI is suggesting that is possible) might be opportunistic. Its now sitting near $2.90. If Gas retreats enough to make $3.50 a worthy profit target, it might be worth a trade. Or, a breakout through $3.50 could be enticing.

As far as trading Natural Gas ETF’s, one can look at a Canadian Natural Gas ETF like HUN (Global X Nat Gas Fund). Or the US listed Gas ETF’s like UNG.

For producers, First Trust (FCG) is a US based ETF that holds the producers. You can use that ETF to explore individual stock ideas in the sector by charting its holdings. I describe that process in my Online Trading Course. There are several Canadian Natural Gas producer stocks to explore. For example, Canadian natural Gas producer Tourmaline (TOU-T) is a position we hold in our platforms, in addition to a couple of other names.

Keep an eye on Nat Gas as the summer progresses. We may be able to take advantage of a seasonal opportunity coming up.

6 Comments

  • Great post Keith. Very helpful to have some suggestions on how to keep your money working in the traditionally slow summer period.

    As a suggested topic would be interested in your favourite range trading and cyclical stocks.

    thanks.

    Reply
    • Thanks Paul. Yes, I often post blogs on sideways or consolidating stocks. Will keep your idea in mind to do another one in the near future.

      Reply
  • Keith I am no longer a proponent of HUN. I think since it moved from Horizons it has changed it’s objectives to forward January pricing. I think we both got burned on buying this one in the last couple of months.
    On the other hand I also did buy UNG in the same timeframe and recently sold it at a very nice profit.
    So I won’t buy HUN any longer, I simply don’t understand it’s measurement or goal, as it does not align with current pricing of nat gas, whereas UNG does move with current pricing.
    Cheers

    Reply
    • Good observation, and yes, I agree. I prefer UNG –also had disappointing results when you did. Lessons learned. Right idea, wrong instrument!

      Reply
  • The question here is, will there be another bubble in spot prices for natural gas, that people in Europe use for cooking and heating, and commercial use in buildings, as happened with Potash in 2022,
    which prompted a bubble at that time, and Nutrien to be bought?
    The potash prices never went back up to bubble prices, and neither did Nutries (August 3, 2022 blog.)

    In Summer 2022, propane shot up 5 times, due to Ukraine’s invasion and the German pipelines to Russia being put out of commission from geo strategic decisions. Even without Canada having built a propane export facility, in New Brunswick or otherwise, prices for as reverted back down to normal. China and India, get getting their oil from Russia, despite the embargo, and Quatar is exporting big-time that natural gas, from what I’ve seen.

    In my views, big profits on trading gas companies hinge on another bubble in gas happening, and nothing indicates that being likely.

    Here, small profits might happen, as you say.

    Reply

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