Investors poured into U.S. Natural Gas ( UNG) last month, and for their efforts, the fund just hit another new 52-week low. It isn't a great vehicle to short natural gas, however, because yesterday the fund's issuer suspended the issuing of new shares pending regulatory approval for a massive expansion.If there are more buyers than sellers (and interest has been strong), shares are likely to trade at a premium even if the price of natural gas declines -- something the fundamentals and technicals would imply.
The frenzy into UNG was based on speculation that natural gas would follow oil and that the ratio between crude oil and natural gas prices would shrink from extreme levels back into the historical range. Ratios have two ways of closing though -- the undervalued asset can rally or the overvalued asset can decline. Over the course of several days, it appears the latter is more likely than the former. Oil prices have come down from the low-$70s to the low-$60s. DBO declined from $26.35 on June 11 to $23.16 yesterday, a loss of 12.1%. Over the same period, PowerShares DB Crude Oil Double Short ( DTO) climbed from a low of $66.66 to $90.77, a gain of 36.2%. Meanwhile, UNG is down from a high of $15.88 on June 17, to $12.18, a loss of 23.3% ... and the oil/gas price ratio remains at roughly the same level as before.
Investors would be wise to avoid stepping in front of a moving train or trying to catch falling knives, but short ETFs and ETNs allow investors to follow the trend. PowerShares DB Crude Oil Double Short ETN ( DTO) is a functional security that will deliver positive returns if oil slides. Much of this move may already be behind us, but aggressive traders can still profit. These are not positions to buy and hold, however, so make use of stops. For more information on UNG, see my previous article. Also check out my RealMoney post about an ETF made up of natural gas stocks.