Seasonal Sector Trades: S&P 500 Halloween to Christmas Gains & Energy Short Setup
By: By Christopher Mistal & Jeffrey A. Hirsch
October 08, 2015
“Massive S&P 500 Gains Halloween to Christmas” is the largest dollar amount winning trade last featured in the Commodity Trader’s Almanac 2013. It now has a cumulative profit of $289,338 per single futures contact over the last 33 years including most recent data. This trade is obviously linked to the beginning of the “Best Six Months” of the year as detailed in the Stock Trader’s Almanac 2015. Going long the S&P 500 near the end of October and holding until just before Christmas has been successful 25 of the last 33 years, or 75.8% of the time. The average move during this trade’s timeframe has been 4.2% since 1982. Seasonal strength is shaded in yellow in the second chart below.
[October Long S&P 500 (December) Trade History Table]
Choices to execute this trade are numerous: full futures contracts, the e-mini electronic futures or a handful of ETFs such as SPDR S&P 500 (SPY) or Vanguard S&P 500 (VOO). SPY has the longest track record, the most assets and is the most heavily traded ETF making it a top choice. VOO’s main attraction is a net expense ratio of just 0.05%. Having issued our Seasonal MACD Buy Signal on October 5, exposure to this trade already exists in the ETF Portfolio, however this shorter-term stands to reinforces the importance of using any October weakness to enter new long positions. There have been just two losses in the past twelve years. Not a perfect track record, but certainly a high probability trade setup. 
[S&P 500 (SP) Weekly Bars and Seasonal Trend Chart (Weekly Data Oct 2014 – October 8, 2015)]
Pre-Winter Prep Pressures Heating Oil
Somewhat counter intuitively heating oil prices usually make a seasonal high well ahead of the peak demand time of the year. Refiners, retailers and consumers are highly trained to stock up on heating oil months before the dead of winter when temperatures are coldest and the need for heat is the greatest. In line with its parent product crude oil, heating oil has a penchant for forming a seasonal high in mid-October.
[Heating Oil (SP) Weekly Bars and Seasonal Trend Chart (Weekly Data Oct 2014 – October 8, 2012)]
This sets up an autumn short trade opportunity. For the past 35 years selling December heating oil short on or about October 14 and holding until around Thanksgiving has been profitable 62.9% of the time, posting gains in 22 of these years for a cumulative gain of $59,228 per contract. This trade runs contiguous to the crude oil short from September to December. This trade’s record over the last fourteen years has improved with just three losses. This is good for a 78.6% success rate since 2001.
[October Short Heating Oil (December) Trade History Table]
Outside of the futures market there are a limited number of ETFs and/or ETNs that provide exposure to heating oil. The obvious first choice would seem to be United States Diesel-Heating Oil Fund (UHN). However, assets and daily trading volume are quite thin at just $4.7million and a few thousand shares per day. The next choice is PowerShares DB Energy (DBE). It has nearly $130 million in assets and trades around 50,000 shares per day on average. This is better, not great, but should be good enough to execute a short trade with. DBE’s holdings currently consist of approximately 21.85% Brent crude, 24.07% heating oil, 19.77% light crude, 10.43% natural gas and 23.87% RBOB gasoline.
[PowerShares DB Energy (DBE) Daily Bar Chart]
Moving in response to recent strength in crude oil, DBE has ticked modestly higher in the past few trading sessions. MACD, Stochastic and relative strength indicators are currently all positive, but DBE appear to be stalling at projected monthly resistance (red dashed line). DBE could be shorted on a failed breakout above $15.05 or on a breakdown below its 50-day moving average at $13.84. Look for an accompanying roll over of its technical indicators to confirm the loss of momentum and change in direction. This trade will be tracked in the Almanac Investor ETF Portfolio.