Little Near-Term Upside For The U.S. Natural Gas Fund

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In the stock market there are winners and losers. In a Utopian stock market it would be great to see every stock, ETF, mutual fund, and index fund rise, but this isn't always the case. The beginning of 2012 started off great for the market, but since the beginning of 2012 if investors had made an investment in the US Natural Gas Fund (NYSEARCA:UNG) investors are currently down 20% year to date. Sometimes this can be seen as a buying opportunity, but I believe the trend will continue downward in the short term.

The US Natural Gas Fund replicates the performance of natural gas prices and invests in future contracts that are traded on the NYNEX. The US Natural Gas Fund is not diversified and is solely a play on natural gas, just like United States Oil Fund (NYSEARCA:USO) is a play solely based on oil. When investing in commodities that are in the energy sector, making plays on ETFs or stocks that have diversification in natural gas have been better plays.

When comparing the US Natural Gas Fund to Powershares DB Energy Fund (NYSEARCA:DBE) and SPDR Select Sector Fund-Energy (NYSEARCA:XLE) one will see that despite natural gas prices falling, the Powershares DB Energy Fund is up 6.90% year to date and SPDR Select Sector Energy Fund is up 4.36% year to date.

In the short term if one was to invest in the US Natural Gas Fund, I would consider this to be a riskier speculative play than investing into stocks or ETF's that are diversified in energy. The Powershares DB Energy Fund and SPDR Select Sector Fund-Energy can also be looked at as speculative plays, but because of their diversification in energy this can provide a cushion of support if other energy commodities rise.

I'm looking forward to the prospects of natural gas being able to compete as a fuel source for automobiles, but in the short term here are some reasons I would avoid investing directly in natural gas and would rather play diversified energy ETF's such as the Powershares DB Energy Fund and the SPDR Select Sector Fund-Energy.

The most obvious cause for the declining price of natural gas is oversupply and not enough demand. Even people who are bullish on natural gas have acknowledged problems with being oversupplied. In the short term for me to be bullish on commodities, two basic factors that will always come into my analysis if I want to invest into a particular commodity is supply and demand. I know this seems like a "no-brainer," but there are still people chasing this falling knife with the notion that natural gas has hit the bottom and so it can only go higher. This may work for some stocks and ETFs that have a high short interest, but every time the US Natural Gas Fund has gained some steam to the upside, the ETF ends up going to the downside.

Chart forUnited States Natural Gas

When looking at the US Natural Gas Fund from a technical point of view, investors will notice that the Relative Strength Index (RSI) has been trending lower for some time, but has not bottomed which would indicate a buy signal. The US Natural Gas Fund is also below its 50, 100 and 200 day moving day averages and has been below these averages since around July 2011. When viewing other technical indicators such as stochastics, momentum and market sentiment (just to name a few) one will notice these are also drifting lower, but not at a bottom.

Chart forUnited States Natural Gas

Another reason I would rather be diversified in energy rather than solely invest in natural gas is because the United States is under utilizing natural gas. Every time oil and gasoline price rise there are always references to how cheap natural gas prices are, but in my opinion it will be a long time before we see thousands of natural gas vehicles and refueling stations across the United States. Even if you are bullish on natural gas and feel if the prices for natural gas are at a solid bottom, one issue that you will have to deal with investing in the US Natural Gas Fund is contango. (For a good example of contango in the US Natural Gas Fund, please click here.)

In conclusion, I would consider playing the market sentiment in the US Natural Gas Fund by buying puts. There are other ways to play the possible downward slide in The US Natural Gas Fund, but buying an in the money or slightly in the money put is a simple speculative option play. For me, this is a short term market sentiment play, as I don't see significant upside in Natural Gas in the short term.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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