ETF Trades: Eyeing Seasonal Lows for Crude Oil and Copper By: Christopher Mistal | December 07, 2023 | Email | Print

For those who were unable to attend the member’s only webinar on Wednesday, the slides and video recording are available here (or copy and paste in a new browser window: https://www.stocktradersalmanac.com/LandingPages/webinar-archive.aspx). In addition to the seasonal pattern charts we have been tracking and presenting throughout the year, Jeff reviewed the numerous seasonal indicators and patterns that occur in December and January.

 

Shortly after first-half December weakness is anticipated to end, we will serve up the annual Free Lunch basket of stocks, page 116 of the Almanac, via email Issue before the market opens on December 18. If you are unfamiliar with Free Lunch, Jeff covered the selection method and seasonal tendencies that support the strategy in detail in the webinar.

 

At the same time, we will be looking for early signs of small-cap outperformance, pages 112 and 114, followed by our Santa Claus Rally, the First Five Days of January and the full-month January Barometer. Based upon the outcome of these three indicators, we may adjust our outlook for the balance of Q1 and 2024. Until then, we remain bullish as this is the seasonal favorable period for stocks and it appears the Fed may just pull off a soft economic landing. Inflation is cooling, employment data has eased, and economic growth appears to be returning to its longer-term trend line.

 

Copper’s Bullish Seasonality 

 

Copper tends to make a major seasonal bottom in November/December and then has a tendency to post major seasonal peaks in April or May. This pattern could be due to the buildup of inventories by miners and manufacturers as the construction season begins in late winter to early spring. Auto makers are also preparing for the new car model year that often begins in mid- to late summer. Traders can look to go long a May futures contract on or about December 14 and hold until about February 24. In this trade’s 51-year history, it has worked 34 times for a success rate of 66.7%. The average gain in all years is 5.5%. After four straight years of declines from 2012 to 2015, this trade has been successful in six of the last seven years with solid theoretical gains. In 2020 this trade was a bust as Covid-19 emerged in China.

 

Cumulative profit, based upon trading a single futures contract excluding commissions and fees, is a respectable $101,450. Slightly less than one-fifth of that profit came in 2007, as the cyclical boom in the commodity market magnified that year’s seasonal price move. However, this trade has produced other big gains per single contract, such as the $16,350 gain from December 2020 to February 2021, and even back in 2011, it registered another substantial $14,475 gain. The worst loss occurred from December 2014 to 2015 when copper declined 11.8% generating a theoretical loss of $8,625. These numbers show this trade can produce big wins and big losses if not properly managed. A basic trailing stop loss could have mitigated many of the historical losses.

 

 

In the following chart, the front-month copper futures weekly price moves (top pane), and seasonal pattern (bottom pane) are plotted. Typical seasonal strength in copper is depicted by a black arrow in the lower pane of the chart. Last year’s seasonal period is visible in the top pane of the chart accompanied by a blue arrow. Since copper’s late January peak, it traded lower through October before reversing higher. This new uptrend could continue as falling interest rates spur demand for mortgages, housing, and autos.

 

 

One option that provides exposure to the copper futures market without having to have a futures trading account, is United States Copper (CPER). This ETF tracks the daily performance of the SummerHaven Copper Index Total Return index less fund expenses. CPER’s daily volume can be on the light side, but it does appear to be sufficiently liquid with average daily volume jumping above 100,000 shares when copper moves. Stochastic, relative strength and MACD technical indicators applied to CPER are all essentially neutral now but were recently near overbought levels. 

 

A position in CPER can be considered near current levels with a buy limit of $23.10. If purchased an initial stop loss of $20.62 is suggested. This trade will be tracked in the Almanac Investor Sector Rotation ETF Portfolio. For tracking purposes, CPER will be added to the portfolio when it trades below its buy limit.

 

 

Another way to gain exposure to copper and its seasonally strong period is through the companies that mine and produce copper. Global X Copper Miners (COPX) holds shares in some of the largest copper miners and producers from across the globe. Its top five holdings as of December 6, 2023, are: KGHM Polska Miedz, Ivanhoe Mines, BHP Group, Antofagasta and Zijin Mining. COPX could be considered near current levels up to a buy limit of $34.50. If purchased, an initial stop loss of $30.79 is suggested. This trade will also be tracked in the Sector Rotation section of the ETF Portfolio. For tracking purposes, COPX will be added to the portfolio when it trades below its buy limit.

 

 

 

Oil companies typically come into favor in mid-December and remain so until late April or early May in the following year (black arrow in lower pane). This trade has averaged 11.79%, 11.15%, and 15.70% over the last 25-, 10-, and 5-year periods respectively. Seasonal strength in crude oil companies has also been ending sooner, typically in late April or early May instead of late June or July over the past ten years. As a reminder, this seasonality is not based upon the commodity itself (crude oil or natural gas); rather it is based upon NYSE ARCA Oil & Gas index (XOI). This price-weighted index is composed of major companies that explore and produce oil and gas.

 

 

SPDR Energy (XLE) is the top pick to trade this seasonal setup. A new position in XLE can be considered on dips with a buy limit of $81.25. Employ an initial stop loss of $72.52. Consider taking profits at the auto-sell price of $99.91. Exxon Mobil is the top holding in XLE at 22.07%. The remaining top five holdings of XLE are Chevron, EOG Resources, ConocoPhillips, and Marathon Petroleum. For tracking purposes, XLE will be added to the portfolio when it trades below its buy limit.

 

 

 

On seasonal cue, the Sector Rotation ETF portfolio has rebounded to an average gain of 5.2%. Our Seasonal MACD Buy Signal was early this year, but October’s broad market weakness provided ample opportunity to establish positions at better levels. As of the close on December 6, the top performing holding was Vanguard REIT (VNQ), up 10.7%. This gain can be attributed to the brisk decline in the 10-year Treasury bond yield and a corresponding decline in mortgage rates. Should November’s jobs report come inline or softer than anticipated tomorrow, the 10-year Treasury yield could easily fall back below 4%. And it could slip even lower if inflation metrics, CPI and PPI, are inline or better than expected next week.

 

The decline in longer-dated yields has also been a boon for technology. SPDR Technology (XLK) is the second-best performer, up 7.7% as of the close on December 6. iShares US Technology (IYW) was slightly lagging, up 6.0% yesterday, but has closed the gap some today. Other notable gains include 7.4% by iShares DJ Transports (IYT) and 7.3% by SPDR Financials (XLF).

 

Telecom’s seasonally favorable period has historically come to an end in late December (page 94 STA). iShares DJ US Telecom (IYZ) is on Hold. All other positions in the Sector Rotation portfolio can still be considered on dips below their respective buy limits. Buy limits have been adjusted for recent gains in the table below.

 

 

 

The “Best Months” are here, the market has been rallying and we remain bullish as pre-election year 2023 nears its end and on into 2024. This has been our stance since our Seasonal MACD Buy signal criteria was met in October and it has been paying off thus far with the Tactical Seasonal Switching portfolio gain climbing to 5.2% as of the close on December 6. The market has been exhibiting some choppy trading in the first half of December. This was expected and suggested by December’s typical seasonal pattern. Based upon that pattern we are expecting second-half December strength.

 

From now until second-half strength begins, “Best Months” positions, QQQ, IWM, DIA and SPY can still be considered near current levels up to their respective buy limits.