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SEASONALITY
To all our dear clients who have been receiving our
quarterly reports, Thanks to your positive feedback, we are sure you
have been quite satisfied with the service provided by our firm.
As part of our ever improving goal, we
have decided to add to our free services, a quarterly Newsletter (we
might change it to monthly or bimonthly later).
Our objective is simply to pass on bits
and pieces of knowledge and education about the products available to us
in the New York Mercantile Exchange (NYMEX) , the Chicago Board of Trade
(CBOT), or the Foreign Exchange (FOREX) markets.
This newsletter is mostly informative and
a tool to educate our clients better. It does not constitute a
solicitation of money in any way shape or form.
Some articles are written by us and
others have been gathered and edited from the Market news media to help
bring light to the topic of discussion. We edited them and modified them
to make them clearer for those readers who are not market experts.
Nevertheless, we are giving credit to the original sources in the
Bibliography at the end of this issue.
Now, on with today’s topic.
SEASONALITY
We can talk about every one of the 60
plus products offered by the Commodity Markets. Many of them hold some
sort of seasonal trend that repeats itself every year or often enough to
help the trader. Nevertheless Energy, or better yet, Gasoline, is
probably the one the fits best the role of Seasonality.
Reoccurring events in nature are often
referred to as seasonal. The American Heritage dictionary defines
seasonality as, “A recurrent period characterized by certain
occurrences, occupations, festivities or crops.” There are numerous
examples of seasonal events in the animal kingdom. Swallows return to
San Juan Capistrano every spring, like clockwork, to feed and breed in
the hospitable environment of the missions. Each year salmon in the
Rogue River of Southern Oregon return to the streams where they were
hatched in order to mate and then die. Following the salmon are
steelhead which feed upon the salmon roe. Following the fish is the
fisherman hoping to pit their luck and skill against these crafty
beasts.
Examples of seasonality are not only
found in the animal kingdom. For example, the price of a winter coat is
generally lower in midsummer than in the briskness of winter. On a balmy
summer day, the price of an umbrella from a street dealer is typically
cheaper than when it is raining.
Seasonality is found in the markets as
well. Currency (FOREX), Energy, Metals, Meats, Softs, and Agriculture
(grains) show seasonal trends to a greater extent than anywhere else in
modern society.
Let me give you real examples of Market
products that depend somewhat on Seasonality.
Grains (Crops)
Crops, for example despite the major
advances in agribusiness in recent years, are still dependent upon
climatic conditions.
One must wait for the snow to thaw from
the prairies before planting Corn. Soybeans must be harvested before the
first hard frost or the crop will be severely damaged.
Adequate precipitation and moderate
temperatures are necessary to ensure a good pollination, thus ensuring
that that the crop will mature and bear the fruits of the farmer’s toil.
It is this reoccurring element upon which
we are going to focus a great deal of our decisions when selecting a
trade. By placing these reoccurring events into the context of supply
and demand, one is able to narrow down potential speculative situations
into areas where the most opportunity exists.
The grain markets follow a fixed cycle of
production, flowing from planting to harvesting at specific times of the
year. The National Oceanic and Atmospheric Administration and the United
States Department of Agriculture (NOAA/USDA) Joint Agricultural Weather
Facility refer to these stages as moisture and temperature 'the
sensitive stages of development'.
During these stages of development, the
crop is vulnerable to damage from the forces of nature.
During planting, too much rain fall can
make field work difficult to impossible. Late plantings can result in
loss of acreage or late development which can result in a lower quality
crop or lower yields. Too little rain can prevent seeds from proper
germination, resulting in loss of production as well.
During pollination, or the reproductive
stage of crop development, excessive heat and a lack of precipitation
result in poor pollination and lower pollination. Extremely low
temperatures and/or excessive rainfall can hamper pollination as well,
resulting in crop loss.
During the later stages of maturation
and/or harvest, excessive heat can cause crop damage. Prolonged exposure
to moisture can reduce quality, allow mold based diseases to spread, as
well as delay the harvesting effort due to the ground being too muddy
for fieldwork.
Early frosts can damage crops as well.
Because grains are produced annually (once a year, in most cases),
supply is replenished only once a year. Grain usage, though it ebbs and
flows, is spread out throughout the year. Thus, yearly production must
be rationed. The rationing mechanism is PRICE.
Price is a function of not only current
supply but perceptions of future supply as well. When current supply is
plentiful and/or future supply appears abundant, grain prices tend to
decrease as consumers become less anxious to secure supply at today’s
prices and producers market their crops more aggressively to secure
today’s pricing before prices erode more.
When supply is relatively scarce and/or
future supply looks uncertain, consumers tend to be more aggressive in
pursuing available supply and producers less ready to part with
production, which results in rising prices.
Live Cattle
The United States is the largest producer
of high quality grain fed beef in the world. With an abundance of
pasture land suitable for grazing and large supplies of feed grains, the
United States is one of the only countries in the world which has a
cattle industry largely separate from its dairy industry.
Cattle production is a long and involved
process with two major production sectors before the meat is packed: Cow
Calf operations and Feedlots.
Cow calf operations are in the business
of reproducing cattle. The finished product of a cow calf operation is
feeder cattle, or a weaned animal weighing between 600 and 800 pounds,
ready to go on feed. Cow calf operations usually sell their cattle crop
to feedlots.
Feedlots are in the business of producing
high quality beef cattle – grading select or better – by fattening them
with grain and protein concentrates.
Depending upon the weight of the animal
at placement in the feedlot, feeding conditions, and desired finished
weight, the feeding period can last from 90 days to 300 days, though it
tends to average about 140 days.
Feedlots sell their production to meat
packers.
Meat Packers slaughter the animals and
package them into the cuts of meat we all enjoy.
As a side note, in recent years, the
industry has tended to shift towards a small number of very specialized
feedlots, which are increasingly vertically integrated with cow calf
operations and processing sectors to produce high quality fed beef.
ANALYST’S COMMENTS
The Science of Hitting
In his book The Science of Hitting, Ted
Williams explains that he marked the strike area into 77 baseball size
cells. Swinging only at balls in his 'best' cell, he knew, would allow
him to bat .400; reaching for balls in his 'worst' cell, the low outside
corner of the strike zone, would reduce him to .230. In other words,
waiting for the fat pitch would mean a trip to the Hall of Fame;
swinging indiscriminately would mean a ticket to the minors.”
For the futures trader, the best cells
are represented by those times of the year when that particular market
that we are trading has had a strong historical tendency to move in a
particular direction. Waiting patiently for only these situations may
make the difference between profits and losses in the game known as
speculation.
Billionaire and market Guru Warren
Buffet, in his 1998 Berkshire Hathaway annual report, summed it up best
as saying, “Under these circumstances, we try to exert a Ted Williams
kind of discipline
Seasonal analysis presents tendencies,
not guaranteed profits. Just because a market has done something for the
past 15 or 50 years, each year does not guarantee that this pattern will
reoccur this year.
The point of seasonal analysis is to find situations
where the environment is such that when a trade is going to be placed,
it is similar to the “fat pitch” Ted Williams describes to us in his
book. We still have to “hit the ball”, but we are only swinging at the
pitches that present the best opportunity. What we are characterizing in
seasonal analysis is the “normal” behavior of the market based on
extensive research of past behavior. By only looking at situations that
have historically been “fat” pitches and practicing good money
management, we should greatly improve our odds of success in trading.
Important Note: I created this newsletter for
another company last year, and I find it relevant to bring it back to
life now working for StoneHedge Advisors. Although the products used to
illustrate seasonality, are not our company’s main focus, they can
easily help the reader comprehend the concept I am trying to convey.
Stonehedge Advisors can, through
FXCM recent purchase of ODL, offer other commodity markets to our
clients. It is also relevant to add that FOREX, GOLD and SILVER
experience seasonal trends as well, and our traders are experts in
seeking out those fundamental opportunities.
The currency markets have become
more sensitive to fundamental influence, forcing traders to stop basing
their decisions on technical analysis alone. A good trader needs to
incorporate all the fundamentals they can get on the currency pair they
are trading before positioning in the market, and yes Seasonality
is one of them.
Bibliography:
Live Stock
Almanac.
Warren
Buffet`s 1998 Berkshire Hathaway annual report.
The Commodities seasonal website.
Feel free to send your questions
or comments to the contact information below.
Randall Enrique Rodríguez
Market Analyst and Independent Consultant
Stonehedge Asset management
http://www.stonehedgefx.com
rrodriguez@stonehedgefx.com
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