The Non-Seasonal—Being Not Wrong Is Easier Than Being Right

We can easily use a seasonal-following strategy when we want to, but such a strategy is hardly flawless or without its own considerable risk. Seasonal trades, let’s face it, don’t always behave this year as they did in previous years, for a large variety of reasons. Actually, we can build the proverbial better mousetrap if we examine what markets don’t do at specific times of the year, looking in effect for a seasonal non-tendency, or, as I like to call it, a “non-seasonal” tendency.

If a seasonal tendency is valid over the years,traders will trade it, and probably profitably too, but the amount of profitability and the interim risk will vary widely from year to year (or else everyone would trade it every year, right?). All right, that’s perfectly clear, but let’s ask a different question. Pick a market, any market, during some portion of the year. What are the largest moves upward and downward for that market within that period, over some reasonable number of years?

For an example of the non-seasonal strategy, take a look at Table 6.1, will you? These are the historical market prices for the NYMEX August unleaded gasoline (ticker symbol HUQ) contract from June 17 through July 26 over 12 years. The first column is the putative entry date, and the second is the market-on-close (MOC) price on that date, which we’ll name as our theoretical entry point. The third and fourth columns are the interim highs and lows reached by the market during the named period.

The sixth column is the MOC price on the end date of the period or the next business day following,which is the fifth column. The seventh column is each year’s result if one had held the trade from the start date through the end date, ignoring all trading costs and not setting any stop-loss point. The last column is the cumulative result achieved over the years by undertaking this trade on the start date and holding it through to the end date unless the stop-loss point (shown below the table, at right) has been hit.

This last column’s figures do take our estimated contest risk into account.August unleaded gasoline closed at 79.40 on Monday, June 17, 2002 (which by a huge coincidence is the date I’m writing this). From Table 6.1, it would seem to be the case that this market’s price tendency is moderately downward in the period we’re examining. Whether trading this very modest seasonal tendency is a good idea is not of immediate concern to us.

But what about the non-seasonal tendency, that HUQ doesn’t rise strongly during this period?HUQ historically has never risen 17% in price over this period, and the maximum gross price rise has been 9.43 cents, 943 points. We want to ask ourselves, “Is there some reason that HUQ might move upward more than this in this period this year?” What are the current market factors that might propel the price of gasoline well higher?

Well, the Middle East situation is as muddled as ever. OPEC is meeting next week, and the “wise men” are saying, to a man, that OPEC members will not raise their production quotas this summer. With West Texas Intermediate (the American benchmark grade) crude oil above $25.00 and the OPEC “basket” of several crudes almost to $24.00, OPEC appears to be perfectly satisfied with oil’s price level, and its members likely won’t lower the production quotas either.

The homicide bombings in Israel are at an all-time high, but this fact doesn’t seem to be affecting energy prices so far. This situation rates to get worse, though, principally because no one seems to have any idea how to stop it, and the Palestinians sound as if they’ve no intention of desisting.After a spring season of refinery problems due in part to 2001’s heroic production runs, refiners seem to have hit a steady stride, and the big Citgo refinery in Illinois is back on line (very important for supplying the custom blend of gasoline required in the upper Midwest).

The EPA, notably and for once, hasn’t issued new onerous regulations concerning summer gasoline.Supplies of motor gasoline are a touch higher than last year, although this figure is down from a 7% year-on-year increase six months ago. Demand is about nine million barrels per week in America, fairly typical for the Memorial Day–Fourth of July period over the past few years.

Norwegian oil workers have just opted not to strike, removing one potential disruptive factor, and Norway and Russia (who aren’t OPEC members) have stated that they won’t honor the OPEC production cutbacks in the next quarter, beginning July 1. The price of gasoline, after a spring run-up, has been whopping and flopping in the 75–80 cent range for a couple of weeks.In terms of supply and demand, there doesn’t seem to be a strong bull or bear case to be made in gasoline right now.