'Tis The Season

Successful equity and commodity investors find that trading ideas are best analyzed through fundamental, technical, or a combination of these two techniques. For energy sector investors a third technique should be added to their arsenal, seasonal trends.

Seasonal analysis involves looking for price movements that tend to occur on a repetitive basis during a particular given time frame for a given market or sector.

The most important aspect of seasonal trading is to not expect a given seasonal trend to magically produce profits every time around. Instead, traders should use a seasonal trend as a catalyst and then make reasonable decisions regarding risk management and trade selection to exploit the potentially profitable situation.

Over the past two decades, the energy sector has demonstrated a strong seasonal tendency to advance during the late-winter, early-spring time period. By late winter, the supply of raw energy products may be running low and production may be gearing up for the upcoming summer driving season. This seasonal low supply, high demand phenomenon creates an excellent trading set up.

A couple of low cost ways to capture this trend is to buy an energy equity mutual fund such as the Fidelity Select Energy Fund (FSNEX), or buying an ETF such as the S&P Select Energy SPDR Fund (XLE). Going back 21 years to 1989 to test this theory, 20 years would have been profitable, with an average annual rate of return at 10.8%, by buying only in the months of March, April and May. In 2009 the return was a record 41.4%.

There is no way to know whether this trade will be profitable in any given year. Seven years in the above trading scenario produced returns of 3% or less. Because of this unknown and occasionally low annual rate of return, many investors who are aware of this trend will not invest. Others will be too over confident and fail to implement proper risk management in executing the trade. The investor who is aware of the risks and plans accordingly, will be rewarded with a high probability profit boost to his trading account.