'Tis The Season

I know, I know, Christmas is usually the time when you use this expression. These words come from the song, Deck the Halls, one of my personal favs for obvious reason. But it accurately applies to the markets in this period of post-correction trading. And that is all I need to put on a trade sometimes.

Commodity markets markets, luckily for traders, are prone to seasonality for various reasons. Weather patterns are the most dominant drivers, with warm and cold weather driving the ebb and flow of both demand and supply.

Think of the demand for natural gas. As the chart below shows, two obvious peak periods of strength (April, October) correspond to the increased demand stemming from seasonal builds of inventories in advance of the heating and cooling seasons in North America.

Natural Gas Seasonality

Late last year, Natgas prices surged on the back of low inventories and strong demand due to nuclear power shutdowns. Unfortunately, unless you held the commodity futures directly you didn't make money, as the chart of a popular gas equities ETF shows.

First Trust Natural Gas ETF

No seasonality effect can offset the macro driven market directions, so unless you saw the correction coming last year, you got slaughtered playing the seasonality in Natgas.

But when both are in your favour, it can be a rewarding trading strategy. Such was the case for gasoline last year. The highly repetitive demand surge stemming from the "driving season" demand increase in U.S. gasoline is seen in the seasonal chart below. Last year, actual prices followed with amazing precision. Hence my oft repeated maxim, "Buy Easter, Sell Memorial Day".

Gasoline Seasonality

2018 Gasoline

So what about Copper? Seasonal influences tend to drive copper in most years of stable economic growth. Auto and housing related demand tends to bolster prices in the period from January to April as producers ramp up production for the spring and summer selling season. Adding to that is the ramp up of Chinese production that follows the Chinese New Year shut-down. We are right in the middle of that this week as the 'Year of the Pig' holiday shut-downs have kicked in. A restart from that slow-down is in the offing. The tailwinds are starting to build for a seasonal trade.

With the FED on hold, and the broader averages in overbought, market participants are desperate to re-risk. A rotation to economically sensitive equities, based on any sign of a re-acceleration of global growth would normally follow from this current period of sideways pause. Copper is the play.

FOMO is back. There is tons of unrisked cash on the sidelines itching to get in. Calls for a hard landing are being ignored. The old adage "Don't fight the FED" seemingly works both ways. They have just signaled an 'all clear' for risk taking.

When they give you a 'get out of jail card' in Monopoly, or for market for risk assets, you might as well use it.

Risk Model: 2/5 - Risk Off

The swing factor for the market seems to be the interplay of AAII sentiment (currently risk-off) and the 3MO VIX, which has collapsed under the FED feel-good message from last week.

The RSI remains overbought but the 200DMA is as neutral as it can be (below).

XIU - TSX ETF

Copper/Gold, although currently in risk-off position, looks poised to re-accelerate above the 50 DMA, after a period of correction. My comments above on the seasonality of base metals would lend support to a break-out in the near future. Go Long for a trade. Tight sell stops would advisable given the propensity for Trump to sabotage the trade deal at any moment.