Seasonal Sector Trades & ETF Portfolio Update: Crude’s Seasonal Slump and Defense Pays
By: Christopher Mistal
September 05, 2019
Crude Oil’s Autumn Deterioration
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 above chart.
[Crude Oil (CL) Weekly Bars and Seasonal Trend Chart (Weekly Data Aug 2018 – September 5, 2019)]
Last year crude peaked nearly right on cue, in late-September/early-October just shy of $75 per barrel. When the decline ended in December, crude traded under $45 per barrel. From late-December until late April crude recovered to trade over $65 per barrel. The trend since then has been lower and that trend looks poised to continue and potentially accelerate. A persistently firm U.S. dollar is likely to limit upside while ongoing trade troubles and slowing growth are likely to dampen demand.
[ProShares UltraShort Bloomberg Crude Oil (SCO) Daily Bar Chart]
ProShares UltraShort Bloomberg Crude Oil (SCO) is one 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 $100 million in assets. Its expense ratio of 0.95% is about average for a leveraged, inverse ETF.
Crude oil’s recent strength has caused a corresponding decrease in SCO. As a result, stochastic, relative strength and MACD Buy indicators applied to SCO are all near oversold levels. SCO could be considered at current levels up to a buy limit of $16.90. SCO will be tracked in the Almanac Investor Sector Rotation ETF Portfolio. If purchased, an initial stop loss at $15.60 is suggested.
Sector Rotation ETF Portfolio Updates
Turbulent trading in August driven by growing recession fears, inversion in the Treasury yield curve and a slowing growth all drove demand for safe-haven, defensive positions throughout the month of August. As a result traditionally defensive sectors and corresponding holdings in XLP, XLV and XLU held up well in August. XLP, XLV and XLU are on Hold.
Precious metals also had a good August. Positions in GDX, GLD and SLV were all added to the portfolio on the second trading day of August as they all briefly dipped below their respective buy limits. Prior to today’s retreat, GDX, GLD and SLV were up an average of 13.3%. Today’s weakness is likely to be brief. The global trend in interest rates is clearly lower with negative rates prevalent throughout numerous developed markets outside of the U.S. GDX, GLD and SLV are on Hold.
iPath Bloomberg Livestock (COW) did not fare as well as the rest of the portfolio. This position was established with a relatively tight stop loss which did limit losses to 3.9%. Since closing out the position in early August, COW has only declined further. Until there is some clarity on trade, it may be best to avoid commodities, especially those that are domestically produced.
Last month’s new trade ideas, IBB and IYW, targeting seasonal strength in biotech and high-tech, remain open positions. Buy limits were set significantly below the market at that time and are still well below current levels. Even after recovering most of the losses that occurred in August, there still remains a possibility better prices could be available later in September or October.
Please see table below for current advice, updated buy limits and stop losses.
[Almanac Investor SR ETF Portfolio – September 4, 2019 Closes]
Tactical Seasonal Switching ETF Portfolio Update
The second month of the worst two-month span (August-September) has arrived. Thus far, thanks to some upbeat news about trade, stocks are in the green so far. But it is only the third trading day of September and today’s “good” news could be just as quickly reversed by “bad” news tomorrow. Market volatility is still elevated. If you are following this strategy, stick with it. Our Seasonal MACD Buy Signal sometime after October 1, will confirm when to consider stocks again.
Defensive, “Worst Months” positions in the portfolio have been performing well. iShares 20+ Year Treasury Bond (TLT) has a 19.3% gain as of yesterday’s close. AGG and BND are also positive with gains of 5.3% and 5.7% respectively. AGG, BND and TLT are on Hold.
[Almanac Investor TSS ETF Portfolio – September 4, 2019 Closes]