Never let “logic” get in the way of a good trade.

The financial markets discount logic. Whatever you think makes sense today… was already priced in to the markets some time ago.

Think about the recent action in financial stocks – which has been lackluster at best.

Two weeks ago, right before many of the financial stocks were scheduled to report earnings, just about everyone – and I mean EVERYONE – was bullish on the sector. “Interest rates are moving higher,” they said. “And financial stocks will benefit from rising rates. So, this earnings season should be good for the companies and good for the stocks.”

It made sense. It was obvious. It was logical.

And that’s the problem…

“Logic” was already priced in to the stocks. That’s probably why the financial sector rallied so strongly three months ago. That action was discounting today’s higher interest rates.

Financial stocks have been horrible performers so far this earnings season, despite most companies reporting strong results. Perhaps this price action is discounting lower rates a few months from now?

Let’s save that question for a later date. Today, I’d rather take a look at another trade setup that appears to defy logic. It involves natural gas.

Everybody knows that demand for natural gas drops in the summertime. Everybody knows that the world is swimming in an oversupply of natural gas inventory. So, with demand falling, and supply increasing, the logical expectation is for natural gas to fall in price.

But I’ll argue that the market has already discounted that.

The price of natural gas peaked in January at $3.55 per thousand cubic feet (MCF). Three weeks later, it was trading for $2.55 per MCF.

That’s a dramatic drop. But the action made sense.

The market was discounting the end of winter (where demand for natural gas is highest) and the beginning of summer (when demand for natural gas is minimal). In fact, if you look back over the past five years, you’ll see a fairly consistent pattern of natural gas peaking sometime in December or January and then declining into April.

Today, though, it seems as though just about EVERYONE is bearish on natural gas. They cite the rising summer temperatures and the oversupply of inventory. All of that should lead to lower prices… or so they say.

The thing is, though, those conditions have already led to lower prices. That’s why natural gas lost almost a third of its value a couple months ago. “Logic” was being priced into the market.

Now, though, the market is telling us something different.

Take a look at this chart of natural gas…

After bottoming in February, the price of natural gas has been slowly climbing higher. Earlier this month it rallied above its 50-day moving average line. And, last week the 9-day exponential moving average crossed above the 50-day MA. This “bullish cross” almost always indicates the start of an intermediate-term rally.

Despite the “logic” that argues in favor of lower prices, natural gas is moving higher. This is a bullish setup.

Traders should take advantage of any weakness and look to buy into the natural gas sector.

Best regards and good trading,

Jeff Clark

P.S. It’s been a busy week in the Delta Report.

We’ve entered three earnings trades since Monday. And now, my favorite stock market anomaly has popped up again… and I’m eager to show subscribers what I’m putting together.

To learn more about this anomaly and my approach to trading the markets, click here.

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