We're Buying This Non-Correlated Asset

JC Parets
March 17, 2020

We are not seeing any evidence of a bottom for stocks, yet. In these sorts of scenarios we want to see improvements in market breadth and/or bullish momentum divergences start to pile up. We're not seeing any of either.

In times like this, where many stocks, indexes and sectors, are in what we call "no-man's land", it helps to find non-correlated assets to analyze and perhaps invest in.

One thing that does NOT move up and down with the US Stock Market is Natural Gas. Evidence of this lack of correlation can be seen throughout 2019, for example, as Natty Gas got crushed while US Stocks soared. 

Let's start with the Intermarket relationships that drove me to bring up Natural Gas. First, here's Natty vs Gold, a standard denominator that we use quite often. It helped us get out of stocks in late January. Will it help us buy Natural Gas?

We're now down to the exact same levels to where Natural Gas started to outperform Gold in early 2012. On an absolute basis, Natural Gas tripled from there in less than 2 years. I remember telling Francis Horodelski on TV about the Rip-your-face-off rally coming in Natural Gas in February 2012. She thought it was funny that I called it that and we've been friends every since!

My friend Josh Brown also wrote about what I was seeing in Natural Gas at the time (See: "Trade of the Year" Feb 2012). Wow I can't believe that was over 8 years ago!

Well here we are again. Back to the same exact level. Will we have a similar result?

To answer that, let's go back to why we were getting bullish Natural Gas in the first place in 2012. A lot had to do with the fact that the Crude Oil vs Natural Gas ratio was reaching bubble territory. Well today, we're already seeing the ripper vs Crude Oil. The relative rally here has already begun:

What about compared to US Stocks? Would we rather be in Natural Gas or equities?

If we're above last summer's lows in the ratio, the answer is: Natural Gas.

So finally on an absolute basis, do we want to own Natural Gas or not?

I like it long if we're above 1.61. That's the only way I can justify owning this thing. Below that and there is way too much risk: both opportunity cost and downside risk in price.

At least a double is what we're looking for here. Once we start getting towards 3.50-3.70 we want to start taking profits.

I like the risk vs reward here a lot. I also like that it doesn't move with stocks and bonds.

See you on tonight's live conference call! Ping me if you haven't received your invitation yet.

JC

 

*Note: If you do not trade futures, you may want to take a look at the United States Natural Gas Fund. Make sure you review its construction before proceeding in any way. I personally prefer futures over ETFs because it's a much more efficient use of capital. But take a look and see if this ETF is something that interests you.

 

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