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.
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: