Agricultural commodities such as corn and wheat experience price tendencies resulting from annual growing cycles. For example, the markets are inclined to push prices lower during harvest time because supply is abundant and risk of the unknown weather interference in the yield has dissipated. Conversely, grain prices are often pressed higher during the planting and growing seasons as speculators price in weather risk premium.
Non-renewable commodities such as crude oil, natural gas and precious metals don't have pre-defined production cycles based on season, but the consumers of these products do. For instance, oil prices are often bid higher in the spring in anticipation of a busy summer driving season, and natural gas sees a bump in price in the fall as energy providers stockpile for the winter months.
Although the seasonal tendencies in the aforementioned markets are the result of varying factors, the outcome is the same. Each year, certain supply-and-demand factors can be counted on to occur. Of course, market pricing might or might not comply.
In most years, the market succumbs to these annual supply-and-demand factors to create the expected annual pattern. Nevertheless, these patterns are far from being a slam-dunk speculation. Along with the obvious market fundamentals, there are underlying factors influencing prices that we have yet to imagine, let alone understand.
In addition, seasonal patterns aren't perfect; sometimes the so-called corn-harvest lows occur in mid-October, in other years it doesn't occur until December. Yet in others, the low might take place in September. The disarray lies in the fact that we are not the only speculators armed with the knowledge of seasonal patterns. Accordingly, markets often attempt to account for seasonal patterns in advance.
Thus, seasonals are simply a tool that indicates what markets have done most often in the past, but they don't necessarily dictate what will occur this year, nor does history guarantee to repeat itself on average in the future. With that said, the odds are that history will repeat itself, and somewhere in the chaos we call the market, there could be an edge to consulting with seasonal patterns before taking action.
Here are a handful of upcoming notable patterns.
Energy Market Patterns
The crude oil rout has been breathtaking, but there is some hope for the bulls in 2015. There is a strong tendency for prices to move higher in the months of February and March. The best explanation is that refineries tend to increase demand during this time in anticipation of the summer driving season.
We typically see a rather meaningful top as we move into May, but that leaves traders two months of potential support for oil prices. Surprisingly, this pattern has generally held true even in the midst of bear markets.
Some might be surprised to learn that natural gas also carves out a bottom in February; however, the pattern suggests it generally occurs in the middle or latter part of the month. The strength in natural gas is the result of anticipation of higher electricity demand as energy providers prepare for the summer air-conditioning season.
Accordingly, it might be a good idea to begin taking moderate nibbles on the upside in energy commodities. Of course, seasonals are only a small piece of the puzzle, so it is important to corroborate these assumptions with your own analysis. As we know, past performance isn't necessarily indicative of future results.
Precious Metals Patterns
The annual cycle in gold is rather tricky; data measured over the last five years, as well as the previous 15 years, suggests stable to higher prices throughout February before prices find a meaningful high in early March. However, when looking at data spanning over the previous 30 years, the February stability is non-existent. In fact, in this time frame the seasonal decline begins in January and extends into mid-to-late July. Thus, history suggests that without significant turmoil forcing scared money into the yellow metal, it will be difficult for gold to move higher beyond a potential temporary February rally. The seasonally bullish time of year begins in the late summer months.
Grain Market Patterns
Late January often launches grains such as corn and soybeans into a bull run. In the case of soybeans, the seasonal rally generally extends into the early summer months but corn often runs out of steam in March. The strength in grains is the result of risk premium being built into the commodity markets as uncertainty regarding the upcoming crop-planting season. Plenty of things can go wrong during planting, and traders know that a bull market in grains can be the trade of the year should Mother Nature rear her head.
There is no such thing as a sure deal, but, in our opinion, ignoring historical behavior is a big mistake. According to the statistics, speculators will be best off looking for near-term bullish opportunities in the energy complex (particularly crude oil and natural gas) and the grain complex (namely corn and soybeans, not wheat, which trades according to a different crop cycle). On the contrary, history suggests the best trade for gold bulls will be to wait until the late-summer months before considering any aggressive strategies on the long side of the market.
Please note: There is substantial risk of loss in trading commodity futures, options or ETFs. Seasonal tendencies are already priced into market values.