Use These Steps to Mine Investments from Any Market Trend

By TradeSmith Editorial Staff

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Friday, we talked about a favorite topic of mine: seasonality.

I promised to deliver a blueprint today on how you can use TradeSmith Finance’s tools to strategize and develop your own trade — for this trend or any other, for that matter.

As a man of my word, today I’m bringing you Part Two.

Plus, I’ll be answering a question from one of our readers.

Digging Into The Data

As a quick refresher, I used TradeSmith Finance’s sector health gauge to pull out the sectors I felt had the most potential.

My favorite was the financial sector because I expect rising rates will drive more profits for banks that lend.

Next, I want to look for premium opportunities in this group.

To do that, I turn to my TradeSmith Finance screener, which allows me to dig into each sector and add in our proprietary technical analysis signals.

Here is the output from my search:

I want to highlight two companies in particular: Tiptree (TIPT) and United Community Bank (UCBI).

Tiptree is a small financial services company that focuses on insurance, real estate, asset management, and specialty finance.

Most of you have probably never heard of the company. I certainly hadn’t.

So why would I bother bringing this one up?

Because it was the only stock with an entry signal in the last 30 days.

All of the other stocks on the list had entry signals five months ago.

So if I want to get in on the action now, this stock meets most of my criteria.

Here’s the only problem.

I don’t know enough about this company and its operations to say whether it makes money when rates increase.

True, it’s got great health and a nice chart.

But, as a small company, it’s less likely to trade in tandem with the larger group of financials.

That brings me to United Community Bank.

Although not widely known, United Community Bank is a local bank with branches in Georgia, South Carolina, North Carolina, and Tennessee.

This stock fits my investment idea much better.

The problem is, the entry signal was in December 2020 at $25.75. Since then, the stock has risen to the mid-$30s.

So, what are my options?

First, I can always do nothing. That’s always an option.

Second, knowing that TIPT is a higher risk, I can take a smaller position there. However, I would want to do a little more digging into the company’s operations first.

Third, I can put UCBI on my watchlist and wait for a pullback that gets closer to the original entry signal. If that happens, I can review the technical analysis provided by TradeSmith Finance at that time.

Questions From A Reader

After Friday’s newsletter, I received a fantastic question that ties in directly to our discussion.

“How far in advance do you think the market anticipates seasonality for events like increases in demand for natural gas every heating/winter season? More to the point, when will prices of stocks or funds such as [First Trust Natural Gas ETF] FCG, [United States Natural Gas Fund, LP] UNG, the natural gas distribution companies, etc. begin to rise in anticipation of the coming winter season?” — Michael N., Florida

Let me directly answer the question and then explain my reasoning.

Markets always price in known or recurring events such as demand for heating in winter. They only react if the forecast changes.

So, the prices of funds like FCG and UNG never increase at a specific time, because they already price in the regular changes in natural gas prices.

Michael’s question brings up an interesting conundrum.

If we all know about seasonality, wouldn’t we just price it in?

The answer is yes.

But I want to split this into two parts: businesses and commodity funds.

With businesses, we build these seasonal trends into the stock price.

Think about a company like Spirit Halloween: 90% of the company’s business happens once a year.

That doesn’t mean the company’s value suddenly shoots up leading into Halloween, unless there’s reason to believe this year will be better than expected.

The same thing happens with energy companies.

We know they set higher prices for certain services in winter and summer.

That gets baked into the price of that company.

FCG is an ETF that holds various natural gas companies, so it operates in a similar fashion.

For commodity funds, it’s a bit different.

Without getting too technical, funds like UNG use futures contracts to track the price of natural gas.

Like options, futures contracts have different settlement dates.

Let’s say that natural gas is typically more expensive in December.

Well, if I compared the September and December natural gas futures contracts, the December one would naturally be more expensive.

Think of it like trying to book a cruise far in advance. It doesn’t matter that you are trying to book one to two years ahead; if you book during the “high season,” it’s going to cost more.

I hope that helps!

I love reading feedback and getting questions from my readers, and I’d love to hear from you, too. You can email me anytime right here. I can’t personally respond to every email, but I do read them all.