Profiting From The Seasonal Shift In Energy Stocks

Adam O'Dell

Adam O’Dell

Energy stocks have been on a tear recently.

The SDPR Energy Sector ETF (NYSE: XLE) gained a whopping 34% in less than five months, between January 20 and June 8, 2016.

This move easily caught the attention of the financial media. And since energy stocks came into 2016 already 40% off their 2014 highs, the early-year rally led many analysts to conclude that “the bottom is in” for energy stocks.

I think they’re wrong.

I think energy stocks are headed lower from here, not higher.

And I’ll explain why…

You see, there’s a seasonal pattern to financial markets.

Investment Help Dent Research Economy and Markets-4
Stocks typically make most of their gains between November and April. Then they produce lackluster returns (with more volatility) between May and October.

The seasonal pattern doesn’t play out exactly like this each and every year. But when you look at decades’ worth of data… that’s the seasonal tendency you’ll find.

Energy stocks are also influenced by seasonal factors. Oil refineries typically do routine maintenance during the first quarter of the year. During the second quarter, refineries switch from producing winter-blend fuel to summer-blend. What’s more, demand for various petroleum products goes through seasonal cycles, as the weather changes.

All told, seasonal influences affecting the energy supply chain create a rather predictable pattern for energy stocks. They’re typically strongest between late-February and early-May. Then they’re weakest between mid-May and late-September.

Take a look for yourself…

This chart shows the average monthly return of the SPDR Energy Sector ETF (NYSE: XLE) for each calendar month of the year:

Chart Energy Sector Cycles

As you can see it typically pays to be invested in energy stocks between February and May… then out of energy stocks between May and September.

This seasonal pattern of strength and weakness applies to the energy sector ETF (XLE). But it also applies to a number of related, energy-market ETFs; including, the SPDR Materials Sector ETF (NYSE: XLB), the SPDR Oil & Gas Exploration ETF (NYSE: XOP), the SPDR Oil & Gas Equipment ETF (NYSE: XES), and the price of oil itself, as seen by the United States Oil Fund LP (ARCX: USO).

For each of these, the pattern is roughly the same: strength between February and May, then weakness between May and September.

Take a look at the average monthly performance of this “Energy Portfolio,” which includes equal investments in each of the five ETFs above (XLE, XLB, XOP, XES and USO):

Chart Energy Sector Cycles

The point I’m making is simple: don’t buy into the energy rally!

At this point, energy prices are more likely at a peak than a bottom. And if this chart doesn’t keep you out of energy-market investments for the next few months, I don’t know what will.

Of course, if you’re open-minded and willing to bet against energy-related investments… now is a great time to make some bearish bets.

In fact, I’ve recommended two bearish bets on the energy sector to my Cycle 9 Alert readers. One is a bet against the energy sector, in general. We’re positioned for lower prices between now and mid-September.

Foliage Investment Help Dent Research Economy and Markets-5

 

The other is a specific bet against a foreign energy producer… one that just so happens to be in a world of hurt. It’s mired in a political corruption scandal and is facing a multi-billion dollar pension shortfall. Basically, the company is trash… and I estimate its stock price could be cut in half between now and October.

I just recommended this position last week, so there’s still time to get in. The specific investment I told Cycle 9 Alert readers about is still within my recommended entry price range… and I estimate this investment could triple your money, at least, if the stock gets knocked lower during the energy sector’s seasonal summer slump. Click here to gain access.

Again, regardless of what you do… I suggest not buying into the energy-sector hype.

Hello, I'm Adam O'Dell

Try my Cycle 9 Alerts' Trading system for 90 days - risk free!

Using my industry-beating algorithm, I track the movements of nine key economic sectors as they rotate in and out of favor. I then leverage that information to predict short-term stock movements with a startling degree of accuracy. Don’t believe me, see for yourself…

A Whiplash Market

June 16, 2016: If you’re feeling a sharp pain in the back of your neck – a la whiplash – you’re not alone. The stock market has been one heck of a roller coaster ride this year!

Not Your Dad's Insurance

June 2, 2016: I recommended a specific insurance policy on May 26. And by September 1, I told members to “cash out” – locking in a net profit of 165%… that’s $26.5K for every $10K.

Why Winners Keep Winning (And Losers Keep Losing)

If “buy-and-hold” and the notion that you can’t beat the market have left you short of your personal and retirement goals, then you’re going to want to hear the truth about passive and active investing.

Chances are, if you’re more than 25 years old, you think it’s impossible to “beat the market!”

But today, there is MORE than ample evidence that proves:

  • The stock market is NOT perfectly efficient
  • Passive investing can be MORE risky than active investing

You CAN beat the market… you just need to use the right strategy!

Get your own FREE copy of the latest report from Chief Investment Analysts, Adam O’Dell, “Why Winners Keep Winning (And Losers Keep Losing)”

Click to Learn More
Categories: Investing

About Author

Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.