Deadly Bottom Fishing

Some readers like to look at fundamentals as a primary decision tool to add a position to their portfolio. Just because fundamental data seem to paint a rosy picture about a certain sector being ready to explode, does not mean that I will.

Never ever have the famous words “it can’t go any lower” rung truer as in the case of natural gas. Over the past few months, I have received several emails about the imminent turnaround in that arena and how great of an opportunity current pricing would be.

One look at a 2-year chart of UNG (courtesy of YahooFinance) tells you the real story:

It represents a sector stuck deeply in a downward trend since about August of 2008, when the trend line was broken to the downside. This is about as graphic as you can get as to why bottom fishing can be hazardous to your financial health.

It supports my view that a simple chart can quickly demonstrate where a sector is headed, while fundamentals will never show you as clear a picture.

Sure, eventually UNG will turn around and present a great buying opportunity. However, you want to first see a clear change in form of the trend line being broken to the upside. While this may take some time to accomplish, it will always be accompanied by improved momentum figures as featured in my weekly StatSheet.

While you can get lucky going bottom fishing, a better mode of operation is to put the odds of a successful investment on your side first. That means not trying to hunt for the lowest price but let upward momentum be your guide as to when to enter.

Disclosure: No positions in UNG

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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