Seasonal Sector Trades: Unemployment & Crude’s Seasonal Decline By: Christopher Mistal & Jeffrey A. Hirsch | September 01, 2016 | Email | Print

August’s jobs report, scheduled to be released tomorrow morning, is being billed as the most important release of the year or something like that. A strong enough number (whatever that may be) could be sufficient to spur the Fed to raise its key interest rate later this month. June and July’s reports showed solid headline job growth that was well above expectation. A third month in a row would apparently make a trend that might be good enough for the Fed to act after sitting idle for the past nine months.

 

Consensus estimates are expecting a number around 180,000 tomorrow morning, but past August reports have a history of misses and substantial revisions. The markets’ response to the report has been mixed over the last 15 years with average losses on the day for DJIA, S&P 500, NASDAQ, Russell 1000 and 2000. In the last 15 years, S&P 500 has moved in excess of 1% on the day seven times. Four were losers and three were winners. The worst loser was 2011 when zero jobs were initially reported. Tomorrow’s jobs report could easily be the catalyst that ends the S&P 500’s low volatility streak at 39 days.

 

 

 

Seasonally speaking, crude oil tends to make significant price gains in the summer, as vacationers and the annual trek of students returning to college in August creates increased demand for unleaded gasoline. The market can also price in a premium for supply disruptions due to threats of hurricanes in the Gulf of Mexico. However, towards mid-September, we often see a seasonal tendency for prices to peak out, as the driving and hurricane seasons begin to wind down. Crude oil’s seasonal decline is highlighted in yellow in the following chart.

 

 

Shorting the February crude oil futures contract in mid-September and holding until on or about December 9 has produced 22 winning trades in the last 33 years. This gives the trade a 66.7% success rate and theoretical total gains of $108,270 per futures contract. Following three consecutive years of losses, this trade has been successful for four years straight. Last year’s trade resulted in the fourth largest profit yet as crude’s decline resumed in mid-October.

 

 

Regardless of the nearly 100% rally in price from the February lows to its highs in mid-June, many of the fundamental issues that triggered crude’s slide from $100 per barrel in 2014 remain in place. Global growth is still anemic, the U.S. dollar is still hovering around multi-year highs and OPEC is still pumping as much as possible in a bid to shake out higher-priced production and maintain market share. Downside could be limited this year as lower prices are keeping production, outside of OPEC, in check and demand has been firm, at least according to weekly EIA data. Crude’s spring rally ended just above $50 per barrel in June and its recent bounce also ended just below $50. Three straight days of declines have crude currently trading under $44 and it appears to be making a run towards $40 and possible lower. 

 

 

ProShares UltraShort Bloomberg Crude Oil (SCO) is the preferred vehicle to take advantage of seasonal weakness. SCO’s benchmark is the Bloomberg WTI Crude Oil Sub index which is comprised entirely of crude oil futures contracts. SCO is designed to return 200% of the inverse of the daily move of this index and has approximately $200 million in assets. Its expense ratio of 0.95% is about average for a leveraged, inverse ETF.

 

Crude oil’s recent weakness has resulted in a brisk rally for SCO. As a result, stochastic, relative strength and MACD Buy indicators are all positive. SCO could be bought on dips below $99.00. SCO will be tracked in the Almanac Investor ETF Portfolio. If purchased, an initial stop loss at $88.00 is suggested.