Seasonal Sector Trades: Silver & Coffee Seasonal Weakness
By: Christopher Mistal & Jeffrey A. Hirsch
May 10, 2016
Silver has a strong tendency to peak or continue lower in May, bottoming in mid to late June. Traders can look to sell silver on or about May 13 and maintain a short position until on or about June 24. In the past 43 years this trade has seen declines 29 times for a success rate of 67.4%. Prior to 2014, this trade had been successful for eight years in a row. Last year, this trade did get back on track and is now been successful in 9 of the last 10 years. In the second chart below, the 43-year historic average seasonal price tendency of silver as well as the decline typically seen from mid-May until the low is posted in late June into early July is shown. This May silver short trade captures the tail end of silver’s weak seasonal period (shaded yellow). A weakening U.S. dollar caused silver to spike in April, but the dollar has firmed and the spike appears to have run its course.
[May Short Silver Futures Contract – Trade History]
[Silver Continuous Contract Daily Bar Chart & 1-Yr Seasonal Pattern]
ProShares UltraShort Silver (ZSL) generally corresponds to two times the inverse of the daily performance of silver. However, ZSL is not tracking spot silver price, rather it is tracking the U.S. dollar price for delivery in London. Nonetheless, ZSL has a solid history of rising when silver price declines. ZSL could be bought on dips below $39.00. If purchased, an initial stop loss of $35.50 is suggested. If ZSL then rises and closes above $40.95 switch to a 5% trailing stop loss. Use ZSL’s daily close to update its stop loss. This trade will be tracked in the Almanac Investor ETF Portfolio.
[ProShares UltraShort Silver (ZSL) Daily Bar Chart]
Coffee Buzz Fades In Summer
Coffee typically posts a seasonal high in May. This creates coffee’s most powerful seasonal play under normal weather conditions, which means a lack of frost in the Southern Hemisphere growing regions of Columbia and Brazil. Traders should look to sell short on or about May 23 and hold through August 9 (shaded yellow in chart below). This trade has worked 30 out of last 42 years for a 71.4% success rate.
[May Short Coffee Futures Contract – Trade History]
This trade did not fare so well in 2006, 2007, and 2010. An explanation as to why this market defied the seasonal tendency to decline in this time period was that there was a lack of rain during the key flower pollination stage, resulting in a much smaller crop than expected in Brazil back in 2007. Estimates were looking for 50 million bags of production, but that estimate backed down to 45 million bags of production. So in essence, supply declined due to poor weather conditions as demand remained steady. Tight supplies and a falling dollar supported coffee in 2010 through early 2011.
Traders can sell futures or implement a bearish option position. As for other trading opportunities, the following chart shows the coffeehouse and distributor Starbucks (SBUX) price line overlaid on the bar chart of coffee. When coffee declines, historically we have seen a price increase for shares of SBUX. The reverse is also true. If coffee prices have been up strong on or about May 23, and if SBUX is off its 52-week high, then traders may want to look to buy shares of SBUX or consider call options. Coffee is indeed up from its lows in January while SBUX is off of its highs. SBUX could be purchased on dips below $57.50. If purchased employ a stop loss of $52.90. This trade will be tracked in the Almanac Investor Large-Cap Portfolio.
[Coffee Continuous Contract Daily Bar Chart, 1-Yr Seasonal Pattern & SBUX Line]
[Starbucks (SBUX) Daily Bar Chart]