Seasonal Sector Trades: Gold’s Thanksgiving Bounce & Secular Bond Bull Withers By: Jeffrey Hirsch & Christopher Mistal | November 03, 2016 | Email | Print

Gold prices tend to move up prior to the holidays, and the trend has worked especially well over the last 16 years. Seasonally speaking, it is best for traders to go long on or about November 17 and hold until about December 2. Over the last 41 years, this trade has worked 22 times for a success rate of 53.7% .The cumulative profit tallies up to $25,220. Up until four years ago this trade had been profitable for 12 straight years (2000-2011). The longer-term history of this trade is not as good, nonetheless profitable. Gold has had a solid year, but this is a short-term trade and gold has become oversold and appears ready for a bounce. 

 

 

The chart below shows the correlation between gold and the exchange-traded fund SPDR Gold (GLD). This fund’s single holding is physical gold bullion. GLD currently holds 945.26 tons of gold giving it a market valuation of approximately $39.5 billion. GLD’s price line has been overlaid on the front-month gold futures contract. The line on the bottom section is the 41-year average seasonal price move for gold with the yellow shading highlighting seasonal strength from mid-November to mid-February. This trade targets the beginning of this seasonal move that typically peaks the first week of December.

 

 

In the next chart, GLD is plotted above its stochastic, relative strength and MACD indicators. All three of these indicators are positive and near overbought levels. GLD is attractive at on dips with a buy limit of $122.75. GLD is already held in the ETF Portfolio and we will add to the existing position should GLD trade below its buy limit.

 

 

 

Typically, we see a seasonal tendency for 30-year Treasury bond prices to peak in mid-November to mid-December and then start a decline lasting into April (highlighted with yellow box below). Perhaps investors seeking a higher return feel more comfortable buying into the year-end stock market rally, so they sell bonds and reallocate funds into equities. Or perhaps end-of-year window dressing or savvy traders, wishing to take part in the up-coming January effect, play a role in the decline of bond prices.

 

 

This trade in the last 39 years has just a 48.7% success rate. Considering the bond market has been in a secular bull market for over three decades, this short trade has fared reasonably well. The trade’s shorter-term record is even weaker with seven losses and just two wins since 2007. Losses in 2007 and 2008 were the result of recession and financial crisis. In 2011 and 2012, the Fed took action to drive longer-term interest rates lower (bond prices higher) and Europe’s debt crisis triggered a flight to safety as well. In 2013, 2014 and 2015 tepid global growth and signs of deflation strengthened demand. Now the Fed’s next move appears to be another interest rate increase. Even though the Fed will only be directly changing the Fed Funds rate, higher short-term interest rates usually translate into higher long-term rates and lower bond prices for existing supply.

 

 

Traders may consider shorting the exchange-traded fund iShares Barclays 20+ Year Bond (TLT) or trading its put options as a replacement for the futures contract. TLT recently broke down through support at its 50- and 200-day moving averages and is just above projected monthly support (green dashed line) at $128.28. Stochastic, relative strength and MACD indicators are all negative. TLT could be shorted near resistance at $133.03 or on a break down below $128. If shorted, set a stop loss at $136. This trade will also be tracked in the Almanac Investor ETF Portfolio.