Oil & Gas. Positive Technicals According To Barrons
More technical & seasonal pattern discussions, this time courtesy of Barrons. {Excerpt}
Link: http://online.barrons.com/article/SB124518909452620607.html#mod=BOL_hps_dc {Subscription may be required}.
Will Commodity Investors Have Summer Fun?
By MICHAEL KAHN
MOST INVESTORS ARE familiar with the phrase, "sell in May and go away." This refers to the tendency for stocks to have a strong winter and a weak summer. Asset classes, from soybeans to British pounds, demonstrate weakness over time in some months and strength in others. It looks like the odds favor a hot summer in oil and gold while Treasury bonds cool off.
John Kosar, director of research at Asbury Research, found that over the past 30 years, oil prices are exceptionally strong between April and September with May providing the best monthly return. Indeed, this May, crude oil gained a whopping 29%.
However, despite the strong spring and summer performance, the market does tend to take June off. The average loss for the month was 0.2% so it really serves as a rest stop for the bulls. Once June ends, however, the seasonal pattern points to three more months of solid gains.
We should step back for a moment to discuss what seasonal patterns really are. As with all market cycles, the seasonal, or intrayear cycle is an average performance over time. There are no guarantees that the market will rise or fall in any given month, but based on past performance we can at least stack the deck in our favor when deciding to invest.
For oil, the odds favor strength resuming in July. Gold tends to show seasonal strength in the latter part of the summer after a rather tepid June and July. According to the Commodity Trader's Almanac (John Wiley & Sons, 2009), buying gold the last week of July and holding into early September has resulted in winners 26 of the past 33 years.
To be sure, there are reasons behind seasonal tendencies. For gold, the fundamentals in late summer perk up as demand for gold jewelry surges.....But the greatest demand comes from the famed wedding season in India, the world's largest consumer of gold.
Technically, this shows up in the charts as rising gold prices during August and September. But no matter what the reasons may be, all we need to know is that this phenomenon happens so we can plan our investment strategies accordingly.
With strong summers ahead for oil and gold, it makes sense that talk of inflation would follow. The bond market typically does not do well under conditions of rising inflation, and as bond prices fall their corresponding interest rates rise.
Over the past 50 years, Kosar has found that the seasonal tendency for the 10-year U.S. Treasury note bears that out.....Again, seasonal tendencies are not guarantees, just averages of historical performances. But if you believe that the financial markets have returned to more normal behavior from last year's truly exceptional volatility, then a weak performance in the bond market can be expected starting in August.
If all these seasonal tendencies work as expected this summer -- rising oil, rising gold and falling bonds (meaning rising interest rates) -- it would present strong headwinds for the stock market. Remember, the seasonals for stocks point to weakness over the summer months and after a 40% rally from March, it would be quite a feat for stocks to keep rallying.
One final note -- the seasonal tendencies for bonds and stocks are based on decades of performance that does not include the effects, real or presumed, of the stimulus package and government efforts to increase liquidity in the financial markets. Theoretically, the flood of money coming into the economy will have inflationary effects and that would reinforce the seasonal tendencies in all markets covered in this column.
Will Commodity Investors Have Summer Fun?
By MICHAEL KAHN
MOST INVESTORS ARE familiar with the phrase, "sell in May and go away." This refers to the tendency for stocks to have a strong winter and a weak summer. Asset classes, from soybeans to British pounds, demonstrate weakness over time in some months and strength in others. It looks like the odds favor a hot summer in oil and gold while Treasury bonds cool off.
John Kosar, director of research at Asbury Research, found that over the past 30 years, oil prices are exceptionally strong between April and September with May providing the best monthly return. Indeed, this May, crude oil gained a whopping 29%.
However, despite the strong spring and summer performance, the market does tend to take June off. The average loss for the month was 0.2% so it really serves as a rest stop for the bulls. Once June ends, however, the seasonal pattern points to three more months of solid gains.
We should step back for a moment to discuss what seasonal patterns really are. As with all market cycles, the seasonal, or intrayear cycle is an average performance over time. There are no guarantees that the market will rise or fall in any given month, but based on past performance we can at least stack the deck in our favor when deciding to invest.
For oil, the odds favor strength resuming in July. Gold tends to show seasonal strength in the latter part of the summer after a rather tepid June and July. According to the Commodity Trader's Almanac (John Wiley & Sons, 2009), buying gold the last week of July and holding into early September has resulted in winners 26 of the past 33 years.
To be sure, there are reasons behind seasonal tendencies. For gold, the fundamentals in late summer perk up as demand for gold jewelry surges.....But the greatest demand comes from the famed wedding season in India, the world's largest consumer of gold.
Technically, this shows up in the charts as rising gold prices during August and September. But no matter what the reasons may be, all we need to know is that this phenomenon happens so we can plan our investment strategies accordingly.
With strong summers ahead for oil and gold, it makes sense that talk of inflation would follow. The bond market typically does not do well under conditions of rising inflation, and as bond prices fall their corresponding interest rates rise.
Over the past 50 years, Kosar has found that the seasonal tendency for the 10-year U.S. Treasury note bears that out.....Again, seasonal tendencies are not guarantees, just averages of historical performances. But if you believe that the financial markets have returned to more normal behavior from last year's truly exceptional volatility, then a weak performance in the bond market can be expected starting in August.
If all these seasonal tendencies work as expected this summer -- rising oil, rising gold and falling bonds (meaning rising interest rates) -- it would present strong headwinds for the stock market. Remember, the seasonals for stocks point to weakness over the summer months and after a 40% rally from March, it would be quite a feat for stocks to keep rallying.
One final note -- the seasonal tendencies for bonds and stocks are based on decades of performance that does not include the effects, real or presumed, of the stimulus package and government efforts to increase liquidity in the financial markets. Theoretically, the flood of money coming into the economy will have inflationary effects and that would reinforce the seasonal tendencies in all markets covered in this column.
About the Author: Michael Kahn, mutual fund co-manager, author of three books on technical analysis, former Chief Technical Analyst for BridgeNews and former director for the Market Technicians.
One further comment from me. I think seasonal patterns need to be understood. Patterns however have a tendency to work, until they don't. There is no guarantee that we will see the same patterns this year as in the past. We do need to know about them, plan for them and develop strategies of how to use them in case they exert themselves again this year.
posted by CR English at 6:41 AM
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