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"Sharpening
Your Trading Skills:" Seasonality in Markets
By
Jim Wyckoff
Two
of my favorite trading subjects are cycles and seasonality. In this
feature, I'll discuss seasonality in agricultural markets.
I
want to start out by emphasizing that seasonality or cycles, by
themselves, do not make good trading systems. However, they are
great "tools" to add to your "Trading Toolbox."
Seasonality
in agricultural markets is a function of supply and demand factors
that occur at about the same time every year. For agricultural
markets, supply stimuli can be caused by harvest, planting, weather
patterns and transportation logistics. Demand stimuli can result
from feed demand, seasonal consumption, export patterns, etc.
Livestock
futures, too, have seasonal tendencies. Hog and cattle seasonals
tend to be caused by production, marketing, and in the case of hogs,
farrowing.
Grains
tend to follow the general rule of lower nearby futures prices at
harvest more than other agricultural commodities.
Here
is a quick summary of seasonals in several markets. (If you are
interested in a more complete study of seasonality, there are entire
books written on the subject.)
Corn:
This market's seasonality can be divided into three time
periods: late spring to mid-summer; mid-summer to harvest; and
post-harvest. The most pronounced seasonal trend in corn is the
decline of prices from mid-summer into the harvest period. Prices
are often near their highest level in July because of factors
associated with the old crop and uncertainty over new crop
production. Even in years when a price decline begins before
mid-July, it can continue after mid-July if the crop outlook is
favorable. Harvest adds large supplies to the marketing system,
which normally pressures prices to their lowest levels of the crop
year. Prices usually rise following harvest. However, the
"February Break" is a well-known phenomenon whereby corn
prices usually show some degree of decline during the month of
February.
Soybeans:
The July-August period is usually a bearish time for soybeans.
Closing prices during the last week in July are usually lower than
those of the previous week in July. Closing prices at the end of
August are also usually lower than those at the end of July. Also,
soybean prices in late January are usually higher than those in late
December. Soybeans many times also succumb to the "February
Break" seasonality phenomenon. Soybean meal and oil have the
same seasonal tendencies as soybeans.
Wheat:
The seasonality of wheat prices works best when a trader is on
the long side from the period of harvest lows to October\November.
On the short side, from winter into summer harvest tends to work
well. Wheat has two prominent seasonals: One is a strong tendency to
decline during late winter and spring as the harvest approaches. The
other is to rise from harvest lows into the fall or early winter.
Wheat prices begin a seasonally weak period by January or February,
in most years.
Live
Cattle and Feeder Cattle: Seasonality in feeder cattle prices
depends on the seasonality in live cattle prices, along with annual
fluctuations in feeder cattle supplies. In general, feeder cattle
prices are strong from late winter through spring, drop during the
summer, and stabilize at lower levels in the fall, before turning up
in December. Live cattle prices normally trend higher from January
through May. Prices for live cattle reach their seasonal peak in May
and then usually begin a downtrend that extends through the end of
the year. Demand for feeder cattle also begins to peak in May, and
prices fall into July.
Live
Hogs: Seasonal marketing pressure increases during March and
persists at increased levels during all or part of April. The reason
for this is that August and September farrowings are usually larger
relative to other farrowing months. Slaughter levels decline
seasonally from March-April into July or August. Thus, prices could
generally be expected to rise from March to May and decline from May
into August.
Cocoa:
The yearly seasonal low tends to occur in January with the Bahia
(Brazil) main crop, rather than in May or June with the Temporao
(Brazil) crop, because of consumer demand. Consumer demand tends to
rise into late fall and early winter, which boosts prices during
that timeframe. As demand peaks and then begins to decline, cocoa
prices fall into January. It's important to note that seasonal
tendencies in cocoa are not very strong.
Coffee:
The frost season in Brazil occurs during the May-August period.
In anticipation of this frost, prices tend to rise from January into
June. This seasonal tendency is not real strong, however, because
coffee can come from other producing countries, such as Mexico.
Still, the potential for a Brazilian frost should be monitored. The
other seasonal influence is during the winter, when U.S. coffee
consumption tends to rise.
Cotton:
Cotton is a market where the "trade" has very heavy
participation and seasonals tend to be a function of heavy
deliveries issued against the expiring futures contracts--December,
March, May, July, and to a lesser degree, October. In November, the
market tends to recover from harvest lows, and then in January the
market tends to back off to lower levels.
Orange
Juice: Seasonal price movement of FCOJ (Frozen Concentrated
Orange Juice) does not usually reflect the December-February freeze
period in the southern U.S. Seasonal tendencies are caused by
harvest, production (also called "pack") and demand
("movement"). The most significant seasonal move in O.J.
is that prices generally fall from November to January. Freezes
cannot be completely ignored, however.
Sugar:
Prices tend to peak in November because of a combination of
supply and demand. Production at this time is not complete, as the
European crop is not yet on the market. Demand in the Northern
Hemisphere, however, is usually at its peak in the fall.
I
would classify seasonal tendencies as "secondary"
technical indicators in my "Trading Toolbox." I do follow
seasonals, but they are not my "primary" trading tools. I
have seen much hype in the marketplace regarding seasonals. I
remember one summer hearing a radio advertisement from a futures
brokerage that went something like this: "Colder weather is
just around the corner and heating oil demand will increase. Thus,
you should buy heating oil futures now, and profit from the increase
in demand." If only futures trading were that easy! Every
professional trader and commercial firm knows that heating oil
demand rises in the winter--and even in the summer months they have
already factored that rise in demand into the prices of the
farther-out (deferred) futures contracts. The same is true for other
markets' seasonal price patterns. The professional traders and
commercials all know about seasonals in the markets, and position
themselves accordingly. It is always good that we speculators have
as much information on markets as possible. Seasonal price patterns
are just one more bit of information to factor into our trading
decisions.
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