Seasonal Sector Trades & ETF Portfolio Update
By: Christopher Mistal
September 07, 2017
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.
[Crude Oil (CL) Weekly Bars and Seasonal Trend Chart (Weekly Data Aug 2016 – September 7, 2017)]
Shorting the February crude oil futures contract in mid-September and holding until on or about December 10 has produced 22 winning trades in the last 34 years. This gives the trade a 64.7% success rate and theoretical total gains of $101,920 per futures contract. Following three consecutive years of losses, this trade has been successful in four of the last five years. 
[September Short Crude Oil (February) Trade History Table]
It has been over three years since crude last traded above $100 per barrel. Ample supply and inventories have largely keep price under $50 per barrel ever since. Even hurricane Harvey had just a modest impact on crude’s price. Gasoline did spike, but crude did not. Crude’s failure to respond suggests it next move could easily be lower especially as summer driving season demand begins to fade.
[ProShares UltraShort DJ-UBS Crude Oil (SCO) Daily Bar Chart]
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 nearly $200 million in assets. Its expense ratio of 0.95% is about average for a leveraged, inverse ETF.
Crude oil’s recent bounce has caused a corresponding drop in SCO. As a result, stochastic, relative strength and MACD Buy indicators are all negative. SCO could be bought on dips below $36.50 with corresponding signs of improvement by technical indicators. SCO will be tracked in the Almanac Investor ETF Portfolio. If purchased, an initial stop loss at $32.95 is suggested.
ETF Portfolio Updates
Over the past month since last update, we have seen the “wall of worry” grow even higher and the market has drifted modestly lower. This is nearly a textbook seasonal scenario setting up. During the past five weeks defensive positions taken as part of our Tactical Seasonal Switching Strategy have improved notably. iShares 20+ Year Bond (TLT) is now up 3.6%, iShares Core US Aggregate Bond (AGG) is up 1%, iShares Silver (SLV) is up 5.0% and SPDR Gold (GLD) is up 6.1%. Other defensive positions in XLP, XLV and XLU are also performing well. These positions are all on Hold.
Short trades in SPDR Materials (XLB), iShares DJ Transports (IYT) and SPDR Financials (XLF) are still underwater. XLF has weakened recently and could soon turn profitable. XLB and IYT are little changed over the past month. Continue to Hold short positions in XLB, IYT and XLF.
Seasonal weakness in natural gas companies has come to an end. Cover the First Trust Natural Gas (FCG) short position. For tracking purposes, FCG will be closed out of the portfolio using its average trading price tomorrow.
iPath Bloomberg Livestock (COW) and PowerShares DB Agriculture (DBA) were both stopped out in mid-August. COW and DBA were closed out using the average trading price on the day after they closed below their respective stops.
CurrencyShares Swiss Franc (FXF) and SPDR Energy (XLE) trades were executed just prior to mid-August. FXF was added when it briefly traded below its buy limit on August 8. XLE was shorted when it broke down through support. FXF is modestly higher now while XLE has bounced and is now in the red. FXF and XLE are on Hold.
All other positions not mentioned above are currently on Hold. Please see table below for current advice and stop losses.
[Almanac Investor ETF Portfolio – September 6, 2017 Closes]
Disclosure Note: At press time, officers of the Hirsch Organization, or accounts they control held positions in AGG, COW, DBA, GLD, SLV, TLT, XLP and XLV.