Nick Hodge is a leading expert in the resource sector, focusing on junior and small cap commodity pl...
Seasonality Trades Coming Up
05/29/2013 7:00 am EST
By knowing where we are in the commodity cycle, you can get an edge in selecting which market to trade, as Andy Waldock of Commodity & Derivative Advisors, offers ideas based on seasonality.
They say that the most important read for a comedian is timing. The comedy in trading is that the market typically delivers its own punch line at the expense of the trader’s timing. Twenty years of trading has proven one thing right over and over again; traders aren’t meant to get it right. The markets constantly change and a pattern that has been developing for months may be no good on the day the trader pulls the trigger. When the trader is right, he's lucky to price either the entry or the exit well. Typically, there’s meat left on both sides of that bone. Therefore, the psychological positive reinforcement must come from the bottom line, rather than the lines on the charts. With this in mind, let’s look at some trading opportunities on the horizon and how to prepare for them.
Starting with a seasonal top, unleaded gas should be rapidly approaching its seasonal high. The build in prices tends to peak just past Memorial Day. Whether this is a gasoline producer conspiracy or, purely supply and demand, there’s no argument about when it hurts the most. The unleaded gasoline market has put in a very tradable top in eight out of the last 10 years during the Memorial Day to June 15 window of opportunity.
Moving to agricultural commodities takes us to the typical weather patterns and their effects on crops. It’s important to understand that the historical seasonal patterns are based on the most probable outcome of a full data set. Therefore, extreme weather events like drought and flood will only register as one year’s data. Thus, the historic spikes we’ve seen don’t have nearly the impact when compared to 10 or 20 years' worth of data. This is why sample size is so important when providing the general guidelines for what’s expected to happen.
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We begin looking for a bottom in the live cattle market before June 10. Fundamentally, the cattle market should be well supported. There simply aren’t many cattle out there. The breeding herd has been on a gradual decline for years. This year is no exception, with the 2013 herd coming at the lowest level in 61 years. The tiny herd size provides the market with two different ways to rally. First, if corn prices remain low, we’ll see cattle affordably held back for breeding. Secondly, if corn prices rise, we’ll see the herd size continue to dwindle. Either scenario takes steaks off the summer grill.
Fortunately, you’ll be able to finance that new grill using the falling interest rates that typically begin between Memorial Day and the third week of June. Even though some of the newer interest rate contracts may not have the history of cattle, corn or, gold at least interest rate futures all tend to trend in the same direction. The typical pattern is for interest rates to peak in the early summer and decline through the rest of the year and into lay-away season.
The final classic summer seasonal trade is to sell soybeans once the planting fears have began to pass. The soybean market always has support through the planting season. In fact it’s not uncommon for soybean futures to set their high price for the year in May or June. Once the crop is safely in the ground, the market breathes a collective sigh of relief. Given normal growing conditions, the decline in prices really picks up after pollination in July.
The summer markets appear to have gotten off to predictable starts. I think the one, notable exception is the strength in the stock market, which we believe has about run its course. In fact the Russell 2000-S&P 500 spread trade appears to have finally turned in our expected direction. The most important concept in these trades is being aware of the seasonal tendencies of different markets as they approach. Mark them down on your calendar. It will take half an hour to do the entire year’s worth for the markets you actually trade. This way you’ll always know if you’re near a market’s inflection point and in trading, predicting inflection points is how we measure our timing.
By Andy Waldock, Founder, Commodity & Derivative Advisors
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