How To Profit From The Polar Vortex
Alamy
By David Sterman

To profit from the short-term openings the market hands you, it takes the right strategy.

That's a lesson I had to learn after correctly predicting that the U.S. would be in for a remarkably cold winter. Though temperatures in much of the U.S. have fallen to the lowest levels in years, the stock picks I suggested simply didn't have enough leverage to weather as I anticipated. As I noted in late December, those picks rose only modestly as winter dug in, even as natural gas-focused exchange-traded funds, or ETFs, fared a lot better.

The explanation is straightforward. As I noted last month, "Many energy traders don't trust quick moves in energy prices, and they assume that profit-taking will soon ensue. If gas prices move back below $4 per thousand cubic feet, then these companies will generate a lesser benefit."

Since then, natural gas prices have kept surging, and these stocks still haven't budged much.

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Yet a change in the weather provides a shot at redemption. Those rapidly surging ETFs appear set to reverse course, and you can even invest in this strategy without initiating a short sale.

Plunging Storage

The surge in gas prices is due to rising gas consumption, which is depleting storage levels at a rapid pace. Though we typically see winter drawdowns, this winter's weather has led to an exaggerated move. According to a recent article by Bloomberg, natural gas inventories fell 50 percent from Oct. 31 through Jan. 17. They've surely fallen even further since Jan. 17, as it has been extremely cold in the Eastern U.S. in recent days as well.


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Yet that's all about to change. Though temperatures are likely to remain below trend through Jan. 29, they are expected to steadily rebound after that. New York City, for example, is expected to have highs above freezing in the subsequent period, which will feel downright tropical for bundled up Gothamites. That won't quickly eliminate the current gas storage deficits. Producers will be working for months to rebuild inventories. But you can bet they will pump all the gas they can, until prices fall below $4 per thousand cubic feet. Meanwhile, electric utilities that can operate on a dual-fuel basis will crimp demand by switching back to coal.

As a result, the remarkable surge in gas prices is likely in the late innings, and it's too late to play this trend for further upside. Instead, as temperatures revert to normal levels, and the hot money flows back out of this trade, bearish ETFs should score quick gains.

To find potential winners, you merely need to seek out recent losers. For example, the ProShares UltraShort DJ-UBS Natural Gas ETF (KOLD) has lost half its value in the past three months.

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This is a "2x inverse" fund, which means it moves at twice the rate, in the opposite direction, of the underlying commodity it aims to track.

Investors feeling especially emboldened about this trading opportunity should check out the VelocityShares 3x Inverse Natural Gas ETN (DGAZ), which has plunged to $4.50 recently from $17 in early November.

Risks to Consider: These two gas funds should be used as short-term trading vehicles and not long-term investments, because they "leak" value as monthly contracts are rolled over.

Action to Take: Natural gas prices are now at four year highs, though as we've mentioned on a number of occasions, the $5- to $5.50 per thousand cubic feet area likely represents a top of the trading range, as producers have much greater incentive to boost production. Dormant wells won't be put into production this week, but the futures market anticipates they would come online in coming months.

The futures prices for June 2014 currently trade at $4.37 per thousand cubic feet, while the June 2015 contract is priced at $4.03. Contract prices for delivery in 2018 are in the same area. In other words, the current surge above $5 may continue for a bit longer as storage levels continue to deplete. But a lifting of the polar vortex means this trade looks set to reverse course.

P.S. Like triple-leveraged ETFs, Stock No. 1 of our Top 10 Stocks for 2014 benefits as natural gas use increases. This company controls 50,000 miles of commodity pipelines and earns a "rental" fee each and every time natural gas and oil is stored or shipped through its network. That's how it's been able to raise dividends 36 consecutive times since 2004 and return 18 percent annually over the past decade. To learn how to get the name and ticker symbol of this stock -- along with the rest of our Top 10 Stocks for 2014 -- click here now.


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19 Comments

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muirwalker

people are dying from this and all you can come up with is how to make a profit from other peoples misery? you should be ashamed of yourself…...

February 04 2014 at 8:41 AM Report abuse rate up rate down Reply
progressivehoax

Everyone would profit if they didn't buy into Al Gore's Climate Change scam.

February 03 2014 at 5:10 PM Report abuse rate up rate down Reply
mjchiara

By the time things become news, it is too late to invest and hope for much upside.

February 03 2014 at 10:32 AM Report abuse +1 rate up rate down Reply
jspfarm

I can't believe all the whining from the east coast- the weather channels and the national news all make it seem like a major disaster whenever the temps. fall below 32 degrees, these folks need to come out to the Midwest and find out how cold it really can get, right now 32 would be almost tropical here for this time of the year. It has been a gold mine for the propane companies, they closed a refinery right at the beginning of the heating season for routine maintenance, and coupled with the extra propane the farmers needed to dry their corn due to a wet fall season, we now have a "shortage " of propane, giving these companies a chance at some very obscene profit taking, we have seen propane prices go from $1.79 a gallon at the beginning of Jan. to as much as $7.55 a gallon at this time, This comes at a time when we are seeing nighttime temps of -25 degrees with daytime highs which never rise above 0. The greed of the utility companies is astounding, If I had any money left after paying them I would definitely consider investing in their companies, looks like their shareholders are going to be pretty pleased if some of this money somehow trickles down to them.

February 02 2014 at 11:02 AM Report abuse rate up rate down Reply
2 replies to jspfarm's comment
docpaws

Here is a plan.....Purchase an extra 1000 gallon tank (cost me less then $2500), then you aren't "renting" a tank from the fuel company and tied to their cost. Purchase your propane in the summer when costs are much lower. It is just as easy to live on last weeks paycheck as it is to live on next weeks check.

February 02 2014 at 11:21 AM Report abuse +1 rate up rate down Reply
k4jlp

JSP,
Thats not the sad part, the sad part is our DO NOTHING CONGRESS who do nothing for the average America making stagnant wages for 20 years. They easily could pass a Bill quickly to cap price increases, however they won't do that since that could "rock the boat" on their promised afterlife from Congress. Our patience is WAINING.

February 02 2014 at 4:46 PM Report abuse -1 rate up rate down Reply
4 replies to k4jlp's comment
stuart100s

Thanks to who wrote "it's so cold that a democrat put his hands in his own pockets" . I'm going to steal that line, and claim I thought of it. Only you and I need to know you have better wit, than me.

February 02 2014 at 9:54 AM Report abuse +2 rate up rate down Reply
stuart100s

How to profit? How about you write a book/movie about the coming ice age. You could call it "The truth that is inconvenient, or the less convenient truth.....something like that.

February 02 2014 at 9:48 AM Report abuse +1 rate up rate down Reply
alfredschrader

Where is Al Gore ? I want a refund for that Global Warming Inconvenient Truth DVD. It's colder now than it's been in 40 years.
The natural gas is going to run out. It's a fossil fuel. In countries where the fossil fuels ran out the populace turned to wood as a fuel, a renewable resource. In some places, like Haiti for example, they used it all up and stripped the land clear. It takes about ten years to grow a stand of fuel lumber. By that time, a lot of people will simply have frozen to death.
What we need to do is spread gymnosperm seeds or seeds for redwoods, oak, and other fuel woods. These grow almost anywhere the seeds fall. We can spread these seeds from light aircraft for pennies. If you do it now, the trees will have time to grow and in the process cleanse our atmosphere. Then, when the gas runs out, and it will, we will have a workable plan instead of bulging graveyards.

February 02 2014 at 7:04 AM Report abuse +2 rate up rate down Reply
1 reply to alfredschrader's comment
obamasam0r0nl

Haiti for example,******** You would should have picked a REAL example, if you were attempting to make a valid point.

February 02 2014 at 9:52 AM Report abuse -2 rate up rate down Reply
freeenquirer

IF there is a 'shortage,' it is because the Profiteers in the USA have been selling the Resources to countries overseas - once again, the Capitalists that have lots of Capital get richer while the American citizens get Screwed.

February 01 2014 at 6:39 PM Report abuse +1 rate up rate down Reply
Larry

The "polar vortex" over-hype is like climate change and it sounds like those stupid Weather Channel names of storms. I am actually very happy that Direct TV dropped them, because they became just pop culture and self-promotion with the new ownership.

February 01 2014 at 4:09 PM Report abuse -3 rate up rate down Reply
thefacts22

Polar Vortex?....is it another global warming invention? or is just another good old harsh winter...Socialists never stop amusing the poor believers

February 01 2014 at 4:07 PM Report abuse +3 rate up rate down Reply