Chapter 3-1 Seasonality and Trends
Seasonality often plays a part in determining prices for commodities in regular cycles throughout the year. Normal increases and decreases in supply and demand for particular commodities seem to occur every year in fairly consistent patterns. Commodity seasonal patterns might appear to be an easy trading strategy for commodities, but seasonal tendencies are just that – tendencies.
Some Popular Commodity Seasonal Patterns
Soybeans – tend to move higher seasonally from February and peak in June. Much of the anxiety over crop losses diminish once the crops are in the ground and this is wrapped up normally by early June. Prices tend to drop during the summer if there are no major weather problems – prolonged drought and major floods. Grain prices tend to drop and bottom during harvest, which is around October.
Unleaded Gas – tends to move higher from February until May. This is due to commercial buying ahead of the summer driving season, which begins on Memorial Day at the end of May.
Lean Hogs – have a strong seasonal tendency to move higher from late February until May. Hog inventories usually drop during this period as packers buy ahead of the summer grilling season.
How to Trade Commodities Seasonally
Most commodities have a couple of strong seasonal tendencies every year. We do not recommend trading solely on those seasonal patterns. Some occasionally use them as a filter when trading commodities. A strong seasonal trend can be the determining factor on whether you take a trade or pass on it.
Many new commodity traders have been burned by using a trading system that only uses seasonal patterns. You may have seen the claims that such and such commodity moves higher 90% of the time during a certain two-week period every year. That may sound enticing, but the laws of statistics will undoubtedly find those numbers if they search enough combinations.
Commodity seasonal patterns can play a very useful role in your trading. They are better used as a guide and they can often keep you on the right side of the market. Remember, the seasonal pattern doesn’t repeat every year, so it is not a foolproof indicator, just like everything else in trading.
We would classify seasonal tendencies as “secondary” technical indicators in a “Trading Toolbox.” We do follow seasonals, but they are not our “primary” trading tools. We have seen much hype in the marketplace regarding seasonals. In a summer not too long ago a radio advertisement from a futures brokerage aired something like this: “Colder weather is just around the corner and heating oil demand will increase. Thus, you should buy heating oil futures now, and profit from the increase in demand.” If only futures trading were that easy! Every professional trader and commercial firm knows that heating oil demand rises in the winter, and even in the summer months they have already factored that rise in
demand into the prices of the farther-out (deferred) futures contracts. The same is true for other markets’ seasonal price patterns. The professional traders and commercials all know about seasonals in the markets, and position themselves accordingly. It is always good that we speculators have as much information on markets as possible. Seasonal price patterns are just one more bit of information to factor into our trading decisions.
As the term implies, commodity trading is better used to describe the commodities markets than commodities investing. The reasoning is that commodities typically do not increase over time like stocks do. Therefore, most people will take a trading approach with commodities to achieve higher returns.
Historical Commodity Prices
Looking at price charts of most commodities it is easy to see that there is no gravitation for higher prices over time. In fact many commodities have stayed in a range since the mid 1970s. Oppositely, the prices of stocks have had a steady rise in prices. Therefore, it would make sense to implement a buy and hold strategy for stocks and implement a commodity trading strategy for commodities.
Commodity Trading Comparison
Commodities do not pay dividends; in fact they actually have a slight decline in price over time due to carrying charges. From 1975 to 2003 the CRB Index ended almost unchanged. An investment in commodities from this period would have netted almost no returns over a 28-year period. The commodities markets finally had a big move where the commodities index more than doubled from 2002 to 2007.
Many commodity traders and managed futures funds that specialize in commodity trading have made excellent returns for decades. In fact, the Barclays CTA Index has had an average annual return of more than 13 percent from 1980 to 2007.