ETFs, Leveraged ETFs, Sector Funds

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During the summer, traders care more about the underlying fundamentals, namely the supply/demand imbalance, itself driven by elements such as production, powerburn demand, imports, exports, etc--which, on the whole, are quite bearish as discussed above. During the winter, however, the focus shifts much more to the near-term temperature outlook due to the larger weather-driven swings in demand. Prices can still spike even in a bearish fundamental environment if the temperature set-up is favorable. With an overcrowded short trade (more on that below) and a significant year-over-year discount, I expect natural gas will be highly susceptible to these sudden spikes with even the hint of a late October or early November arctic outbreak in the near- or even long-term models. Such spikes will be wildcards, not supported by fundamentals and would require Mother Nature to led a considerable hand.

On Friday, the Commodity Futures Trading Commission (CFTC) released its weekly data detailing natural gas money manager long and short positions through Tuesday, September 24. The Commission announced that the short-covering that had overtaken the sector for the previous 6 weeks has ceased. Open short positions rose by 1,679 contracts to 208,135 but are still well below the 52-week high of 367,343 positions from back in early August. Additionally, selling resumed with long holdings falling 14,190 contracts to just 133,314 positions, just above the 52-week low of 124,694. As a result, the Bullish Sentiment--the percentage of positions held long--fell by 3% week-over-week to 39%. This is still 12% above the 52-week low, but is an excessive 31% lower than 2018 and 22% below the 52-week average. Additionally, this data is up to date only through last Tuesday and with an additional 3 days of selling not yet accounted for, it seems likely that the Sentiment is now closer to 35%. Clearly, the natural gas long trade is not a popular one right now. This overwhelming dominance of the bears will limit the bulls' capacity to kickstart a rally. Even last month's nearly 30% spike was driven not by buying--open longs are within 10,000 contracts of 52-week lows--but by short covering. These same smart shorts now seem to have started reloading their positions. Long-term, the short trade is extremely overcrowded. Should the fundamentals change--or, more likely, Mother Nature lend a hand in the form of an early-season arctic outbreak--this one-sidedness could trigger a rapid short squeeze as the short covering swamps the sector, similar to what was seen earlier this month or, more spectacularly, last November. Click HERE for more on the latest CFTC-reported natural as long and short positions.