ETF Trades & Updates: Oil’s Seasonal Retreat
By: Christopher Mistal
September 02, 2021
Seasonally speaking in a typical year, 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 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 September 2020 – September 2, 2021)]
Last time around this trade did not work out all that well. Crude oil had modestly recovered from its historic decline triggered by pandemic shutdowns but was only trading around $40 per barrel in early September of last year. From that early September high to its early November low it only declined to around $35. Oil’s modest price decline appears to have been more of a consolidation period of choppy gains and losses than a typical seasonal retreat due to demand easing. This year oil is trading right around $70 per barrel, down from an early July peak near $75. With this summer being much closer to pre-covid summers in regard to oil demand, this trade appears to be setting up better this time around.
[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 Commodity Balanced WTI Crude Oil Sub index which is comprised of crude oil futures contracts. SCO is designed to return 200% of the inverse of the daily move of this index and has around $80 million in assets. Its expense ratio of 0.95% is about average for a leveraged, inverse ETF.
Crude oil’s gain this year has caused a corresponding decrease in SCO. Stochastic, relative strength and MACD Buy indicators applied to SCO are at or near over oversold levels due to a recent bounce in oil. SCO could be considered on dips with a buy limit of $17.12. SCO will be tracked in the Almanac Investor Sector Rotation ETF Portfolio. If purchased, an initial stop loss at $15.41 is suggested.
Sector Rotation ETF Portfolio Updates
Even as the S&P 500 enjoyed well above historical average performance in August, defensive positions in the portfolio held up well. Historically boring, SPDR Consumer Staples (XLP) continued its advance and was up 19.4% at yesterday’s close excluding dividends and any trading fees. SPDR Utilities (XLU), another defensive position, also had a respectable August and was up 12.5% at yesterday’s close excluding any dividends or fees.
Healthcare and biotech positions also performed well over the past month with the majority of the gains occurring since just after mid-August. iShares NASDAQ Biotech (IBB) is the top performing position in the portfolio, up 30.5%. In last month’s Alert we were looking to expand the portfolio’s exposure to biotech. IBB did retreat early in August, but never traded below its buy limit. However, SPDR Biotech (XBI) did, and it was added to the portfolio on August 17. Since addition, XBI is up over 13% as of today’s close. IBB and XBI are on Hold.
July’s short trade ideas in the transportation and industrials sectors are having mixed results. iShares Transportation (IYT) and SPDR Industrials (XLI) are currently trading right around the levels they were shorted at. Ample Fed liquidity and fiscal stimulus appears to be staving off typical seasonal weakness for now. Continue to Hold short positions in IYT and XLI with a mindful eye towards their respective stop losses should these trades go further in the wrong direction.
Despite ongoing QE and surging inflation metrics, gold and silver have remained subdued. VanEck Vectors Gold Miners (GDX) was stopped out on August 9 as precious metals retreated in expectation of Fed QE tapering clarification. iShares Silver (SLV) was also stopped out in early August. SPDR Gold (GLD), currently the oldest holding in the portfolio is on Hold.
[Almanac Investor SR ETF Portfolio – September 1, 2021 Closes]
Tactical Seasonal Switching ETF Portfolio Update
Thus far this “Worst Months” period has been solid when compared to historical average performance. Fed liquidity and near-zero rates have successfully staved off typical seasonal weakness. Such strength, for a second year in a row, likely creates some doubt about the effectiveness of the Tactical Seasonal Switching Strategy. Rather than focusing on this doubt it may be more productive to examine the current investing situation to determine if it is likely to be sustainable going forward. Historical fiscal stimulus from the Federal government just does not feel likely to become a new normal nor does historic levels of Fed liquidity. 
The Fed has already signaled its intentions to begin tapering asset purchases and Federal programs are slowly coming to an end. Combined with a slow but steady return to pre-covid activities, the direction the economy appears to be headed in is the same it was before the pandemic. In that situation there is over 70 years of historical data in the Almanac supporting the Switching Strategy. No strategy is perfect 100% of the time and current conditions are (hopefully) not a new normal. We will continue to adhere to the system while continually researching ways to further improve results going forward. 
Defensive, “Worst Months” positions in the portfolio continue to perform their function by being a relatively stable and safe place to park cash. AGG and BND are positive with gains of 1.1% each excluding dividends and trading costs. AGG and BND on Hold.
[Almanac Investor TSS ETF Portfolio – September 1, 2021 Closes]