RJ Hamster
What Not to Buy After That Massive Snowstorm
What Not to Buy After That Massive Snowstorm
BY MICHAEL SALVATORE, EDITOR, TRADESMITH DAILY
In This Digest:
- Why you should avoid the natural gas bandwagon
- The “forgotten middle class” of stocks is this year’s big winner
- The Predictive Alpha Leaderboard shows us software is still doomed
How investors got ahead of the sprawling U.S. snowstorm…
Over the weekend, a massive snowstorm hit more than 32 states in the Midwest and Northeast regions of the U.S.
By late Sunday, close to a million homes from Colorado to the Atlantic coast were without power in freezing temperatures. More than 14,500 flights were grounded across the country, the most since last year’s government shutdown. And a foot of snow slammed into New York City, threatening to slow transport across the world’s financial center to a halt.
Major weather events like this are important to keep an eye on as investors. Because they can often ignite heavy price action in key sectors.
Take natural gas, for example. Over the course of a week, natural gas surged more than 70% back to the December highs:
Traders rightly expected a surge in demand for the key heating fuel for the colder regions of the U.S.
And in late trading on Sunday, prices hit over $6 for the first time since 2022 – when the Russian invasion of Ukraine threw the global energy economy into disarray.
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Now, here’s why you don’t want to run out and buy natural gas stocks…
At least, not right now.
There’s a big difference between a chart like the above on a commodity and one on a stock.
What we’re seeing above is a demand surge based on a freak storm. It’s not a stock suddenly seeing a major turnaround and a breakout. It plays by different rules.
At this point, the natural gas trade has run its course and the odds are stacked against any continued surges. And we can prove that with data.
Take a look at the 15-year seasonality chart for the United States Natural Gas Fund (UNG). It’s in a red zone here from mid-January to mid-February:
That’s because, at this point in the year, natural gas prices almost always turn down after a brief initial spike.
Going back to 2011, natural gas has fallen from Jan. 14 to Feb. 11 all but two years – 2014 and 2021. Taking all years into account, the fuel falls 9.5% on average.
Demand for natural gas could stay elevated through the week as the storm ends and temperatures slowly rise. But again, the odds are stacked against any sustainable rise through Feb.11.
Natural gas stocks may be a great buy later in the year as we get past the winter season and prices inevitably drop. Just take note that the best time to take profits has historically been in these winter months.
It’s so important to understand seasonal trends like this, especially in a time when trend-chasing headlines and social media posts factor heavily in investor behavior.
Here at TradeSmith, we build tools that cut through that noise and give you meaningful signals to trade.
And our Seasonality charts are just one part of the Trade Cycles package.
Our CEO, Keith Kaplan, went live last week to discuss how we’re applying our Seasonality tools to a brand-new portfolio strategy.
Along with that, he shared a free seasonal trade recommendation for you to test out yourself as we’re set to close out the first month of 2026.
Check out the presentation here, and do it soon. This comes offline tomorrow at midnight.
There’s a big opportunity in small stocks right now…
Two under-owned classes of stocks have outperformed the large-cap indexes this year – small caps and mid caps.
While the large-cap S&P 500 (blue line below) is up just 0.4%… and the Nasdaq 100 tech index (orange line) just 0.5% …
The S&P 400 mid-cap index (light blue line) is up 5.1% in 2026. And the S&P 600 small-cap index (green line) is up even more, at 7.4%. Take a look:
Mid-cap stocks are between $2 billion and $10 billion in size. And small caps are between $250 million and $2 billion.
And there are plenty of good reasons for these smaller stocks to rally right now.
- Traders are anticipating continued interest rate cuts from the Fed, which benefit smaller companies that tend to borrow a lot to fund their operations. Cheaper borrowing costs will drastically improve their expenses.
- Smaller stocks have underperformed for this entire bull market.
Take a longer view of the same chart above and we can see how much catch-up potential these stocks have.
The tech-filled Nasdaq 100 (NDX) has returned more than 110% over the past three years. And the S&P 500 (SPX) has returned about 70%.
But the mid-cap index (MID) is up just 35%. And the small-cap index (SML) is up 27%:
If mid- and small-cap stocks are going to play catch up, let’s try to find some standouts…
In the TradeSmith Screener, let’s look for mid- and small-cap stocks that:
- Are in both their Long- and Short-Term Health Green Zones – giving us long-term stability and recent momentum.
- Cheaper than the average S&P 500 stock based on their price-to-earnings (P/E) ratio.
- Up at least 20% in the past year.
- And have a Business Quality Score higher than 75. (That puts them in the top brass of the market by business quality, based on TradeSmith’s proprietary rating system.)
The results shrink the mid- and small-cap indexes from 1,000 stocks to just 47. Let’s sort by Short-Term Health Buy signal to find stocks with strong recent momentum:
The top five are: Fresh Del Monte (FDP), nVent Electric PLC (NVT), Primoris Services (PRIM), Powell Industries (POWL), and Sally Beauty (SBH).
Each of these stocks beat the S&P 500’s 13.6% gain over the last year. And they absolutely smoked the performance of the S&P 400 and S&P 600 indexes they’re part of (which rose 9.5% and 7.4%, respectively).
They’ve all flashed new Short-Term Green Zone signals over the last week – indicating strong momentum.
And they’re all cheaper than the average stock in the widely owned S&P 500. In the case of fruit and vegetable producer Fresh Del Monte (FDP)… and retail beauty supplier Sally Beauty (SBH)… much cheaper.
Keep an eye on these stocks throughout the year as interest rates continue to fall and smaller companies get a boost.
The top bearish plays on Predictive Alpha…
For the past three years, TradeSmith has been using AI to radically transform our business.
Not just to help us write emails more quickly or to reformat our spreadsheets. We’ve taken AI to the next level by turning it into a stock forecasting tool.
Our Predictive Alpha software uses a Large Numbers Model algorithm to predict the likeliest next number in a sequence… just like the way ChatGPT predicts the next word. Each prediction forms a short-term forecast, which we track and continually monitor whether it was right or wrong.
Even better: Every single trade reinforces the model, making it more accurate over time.
I like to keep an eye on Predictive Alpha’s Top Bearish forecasts on the TradeSmith Finance Dashboard. It can help you identify stocks in bad trading patterns… but it can also reveal broader trends.
Take a look at the list below, and you’ll see what I mean. These are the top 5 bearish Predictive Alpha forecasts, sorted by expected decline:
We’re still seeing a lot of expected pain in software stocks, with ACI Worldwide (ACIW), Intapp (INTA), and Appian (APPN) all being software companies.
As we discussed last week, software companies are at great risk of being disrupted by AI coding programs that offer businesses the ability to quickly make their own software to fit their needs.
The first data-driven evidence we saw of this trend was the major momentum shifts in the Nasdaq 100 stocks. Above, we see it continue with a number of stocks outside this key index.
Any enterprise software stock is to be avoided right now, and Predictive Alpha is backing up that idea with the latest projections.
There are plenty of better opportunities out there that our algorithm supports. Look no further than the group of smaller stocks we looked at earlier, namely electronic equipment maker Powell Industries (POWL):
Of the five small caps that our screener highlighted, POWL has the highest projected rise of 6.8% from now through Feb. 10. And in the past, POWL has hit its projected target price more than 84% of the time.
That’s the kind of trade to focus on right now. POWL has both a narrative tailwind in the need for reliable power infrastructure after a major snowstorm… and a data tailwind in its Predictive Alpha forecast. Keep a close eye on it.
To building wealth beyond measure,
Michael Salvatore
Editor, TradeSmith Daily
