Oil, Oil is Everywhere
ByMy favorite seasonal trade is oil stocks from February 25th to May 9th. Although this sector underperformed the broad market because of the strong rally in March, the sector once again produced a positive rate of return. The sector has been positive 24 of the last 26 winter seasonal periods. In the XEG chart I have illustrated the success of this trade over the last three years with green and red arrows with circles around them – green for the buy date and red for the sell date. This seasonal trade is considered to be very strong because of its past success rate.
There is another seasonal trade for oil that lasts from July 24th to October 3rd. This trade has produced an average gain of 2.9% and has outperformed the S&P 500, 63% of the time. Neither the gain nor the frequency is as strong as the winter oil trade. In managing a portfolio with this trade, a lower equity amount should be used and more attention to technical action in the markets should be considered. For more details on the year by year performance of the oil sector.
Oil and oil stocks tend to do well at this time of year because refineries are preparing winter by switching over some of their capacity to produce heating oil. Because heating oil it is typically shipped in autumn, extra demand from the refineries tends to push up the oil prices in the late summer and early autumn.
If we take a look at the XEG performance over the last three years, it is evident that XEG has been range bound for two and a half years and then the sector melted down with the stock markets and the expectation of slower global growth. Towards the end of September the XEG had a death cross (50 Day MA crossing over the 200 Day MA). As this bearish condition occurred just before the end of the seasonal trade, it was an indication that the trade should be exited early.
The line at $18.25 had previously acted as good support when XEG was range bound. Now the ETF is below this line, the same line is providing resistance and hampering progress past this point. The sector has turned down from this point and looks to be heading lower. At the start of the seasonal trade look for XEG to be at $14 and possibly $13. A very bullish scenario, although unlikely, would be for a run up to $18. At this point investors should consider capturing some profits.
