If there has ever been a more controversial, misunderstood, overregulated, in and out of vogue tool for “forecasting” certain commodities prices, it is seasonal tendencies. The problem with seasonal tendencies in commodities is that many investors either misinterpret them or do not understand how to use them properly. However, when used correctly, seasonal tendencies provide a powerful tool for commodities investors.
The good news is that seasonal tendencies are still alive and well in commodities markets and available to anyone who wishes to interpret their compelling data. No, they are not perfect. But investors cannot discount them as a major fundamental factor in almost any commodity market.
The Time to Look Ahead Is Now
Seasonal analysis can and should play a big role in your overall study of individual market fundamentals. Seasonal tendencies in commodities (also known as “seasonals”) are not perfect, of course. Nor are they guaranteed to be accurate predictors of market direction. Their value to you is in reflecting certain fundamental events that tend to occur around the same time each year.
These events can affect price of the underlying commodities in certain ways. Becoming aware of these events and how they have influenced prices in the past (although past performance is not indicative of future results) can give you an advantage in assessing trade opportunities.
Seasonals Provide Opportunities in Many Sectors
The seasonal changes of spring bring changes in weather that can impact the supply/demand balance for commodities whose natures are cyclical (most of which, to some degree, are). As the change from winter to spring is one of dormancy into activity, this time of year presents some of the most dramatic seasonal price tendencies in commodities. In the coming months, Cordier Commodity Report will highlight seasonal opportunities in these sectors.
There is probably no commodities sector affected more by the change from winter to spring than Energies. In the heart of winter, oil refineries often shut down for maintenance. However, the summer months bring peak demand season for both gasoline (for summer “driving season”) and natural gas (demand for electricity to run air conditioning spikes in summer). Thus, demand for both gas and unleaded gasoline often increases at the wholesale level prior to peak demand season. This has tended to be a bullish force for prices in years past (although not every year and not guaranteed to be this year).
Grains and Oilseeds
Spring is planting time in the heartland of the US. In the breadbasket of the world, farmers begin tilling fields and their planting intentions for wheat, soybeans and corn become clearer. Weather is often a factor and delays or changes in planting can create shifts in projected supply for the upcoming crop year. Later plantings can sometimes mean lower expected yields. Wait too late and a farmer may have to switch his acreage intended for corn to soybeans instead (which can be planted later). Anxiety over planting season itself is often enough to buoy grain prices in the spring. This anxiety can sometimes be exploited by astute speculators on both sides of the market.
While often neglected by novice traders, the softs markets offer some of most enticing seasonal tendencies on the board. Spring in the northern hemisphere means autumn in the southern hemisphere. That means harvest time in South American staples such as the coffee and sugar markets. The harvest cycle can have a dramatic impact on South American commodities prices. These can be great markets to trade because not many people know (or bother to learn) how to analyze the fundamentals of them. Those who do will have a tremendous advantage.
Consider Seasonals in Context of Overall Market
While you cannot always base a trade on them, seasonals are an invaluable tool for commodity speculators. A wise trader should always give seasonals their due, but consider them within the context of the market as a whole. Understanding the fundamentals that drive these tendencies will give your seasonal analysis more valuable perspective. Combining seasonal tendencies with fundamental and technical analysis offers a strong foundation for market forecasting.
Investors should always keep in mind that seasonals have their drawbacks. First and foremost, past performance is not indicative of future results. Just because it happened last year, or even the last 10 years, doesn’t mean it’s going to happen this year.
Season tendencies in commodities are just that: tendencies. This means prices have, in the past, tended to move in a certain direction during a certain time of year. However, there are no guarantees as to what point in that time period prices will move, how far they will move or if they will even move at all. There are no promises made that prices will not spasm sharply in the opposite direction than they are “supposed” to move, right before aligning with a seasonal tendency. One cannot blindly assume that prices will automatically move in a manner consistent with a seasonal chart.
Seasonal tendencies are driven by underlying fundamentals that tend to happen at the same time each year. The mistake novice traders make with seasonals is the assumption these tendencies provide an exact roadmap of what prices should do. It’s just not that simple. What if harvest finishes early or the crop comes in smaller than expected? Prices could react sooner and you would miss the move. What if the crop comes in larger than expected or something happens to crimp demand? You could buy right before the market begins an “unexpected” move lower, or simply doesn’t move at all.
Traders also must not discount the relative nature of seasonal tendencies. Think of the opposing factors moving different commodities prices as two weights on either side of a seesaw. Rarely is all the weight on one side. Seasonal factors can put more weight on one side of the seesaw. However, that does not mean that an even heavier counterweight cannot come down on the other side – negating the seasonal effect.