Seasonals
Cycles and seasons effect much of our lives. For most of you, the first images that
the word "season" conjures up are usually images of the four seasons (…and I am
not referring to the singing group). Nevertheless, the term "season" also refers
to events that occur on a routine basis, such as Christmas, baseball, hurricane,
and planting season, etc. Of course, as futures traders, we are concerned with seasons
from a different context. What we want to know is "are there repeat patterns, or
seasons, in the futures markets?" For many traditional commodities, such as grains,
one critical variable effecting prices is the weather, or weather seasons. The obvious
relationship between weather seasons and commodity prices has been tracked throughout
history. In fact, the Farmer's Almanac, which tracks historical weather patterns,
planting seasons, etc. has been published throughout this century. However, keep
in mind that non-agricultural markets such as the financial and currency markets
are obviously not directly effected by weather, yet there are also historical patterns
in those markets.
As traders, we might be able to use Seasonal Analysis to help us trade the futures
markets. Remember the phrase, "those who forget the past are doomed to repeat it"?
Well, when trading, knowing the past and being able to repeat it may not be such
a bad thing! In a nutshell, seasonals can be found by looking back in time, usually
at least 5-years, and picking out the windows of time (the "seasons") where a market
has made a move in one particular direction more often than not. This pattern may
occur for whatever reason. The fact is, pure and simple, that patterns do exist,
but they cannot always be explained, nor are they guaranteed to repeat. On the other
hand, some things, such as the planting and harvesting of Soybean crops, occur each
year like clockwork.
Remember though, no price pattern is ever guaranteed to repeat itself…past performance
is no guarantee of future results.
An example of a seasonal trade window might be the following: "From approximately
November 20 to December 8, February Crude has fallen 13 of the last 15 years." Then
of course there are details such as; how much of a drop each year, what's the largest
drop, the largest drawdown (risk) etc. Some of the best Seasonal Analysis studies
that we have come across are from the
Moore Research Center, Inc. in Eugene, OR.
It is critical to remember that past performance is no guarantee of future results.
Seasonal analysis is merely another tool for futures traders. Seasonals should not
be used in a vacuum, and the analysis and data should not be considered trading
advice or recommendations. It may also have absolutely no significance to day-traders.
These hypothetical results do not account for slippage, commissions, and/or fees.
Seasonal Futures Spreads
Just as seasonals can be applied to futures contracts, so to can seasonals effect
spreads. Spread trading involves following the difference in price between two futures
markets. There are intra-commodity spreads that involve the same commodity in different
months, and inter-commodity spreads that involve related markets. For instance,
an example of an intra-commodity spread would be if you simultaneously bought July
Corn at 2.25 and sold December Corn at 2.34, you would have entered the spread at
9 cents. Now you are looking for the spread to narrow, or get closer to zero (more
negative) to make a profit. If you simultaneously liquidated the July Corn at 2.21
and the December Corn at 2.23, you would have exited the spread at 2 cents, thereby
making a 7-cent profit per spread (not accounting for commissions). Another way
to look at it is you lost 4-cents on the July Corn (2.25-2.21=.04) and made 11-cents
on the December Corn (2.34-2.23=.11), which is a net gain of 7-cents.
Some advantages to spread trading are that traders don't necessarily have to determine
market direction because they are only looking at the spread difference. A market
can go up or down and a spread can still make money. It is also possible that both
legs of the spread can move adversely against the trader and the trader could end
up losing twice as much as a net futures position. Margin requirements are also
usually lower with spreads. However, that does not necessarily mean that a spread
always carries lower risk.
For further explanations on seasonal trading, contact us and speak with an ALTAVEST
broker at (800) 994-9566.