It's time to look ahead to February and search for the top investment opportunities in the world of commodities. The Commodity Trader's Almanac 2012 has a variety of seasonal plays spanning all twelve months of the year. Of the 58 ideas the almanac offers, three of the top seven most successful historically on a percentage basis are initiated in February. They are as follows (trading days refer to days the CME trading floor is open, and hold period begins the day after the position is opened):
1. Long Crude Oil (NYSEARCA:USO) - From 1984 to 2011, if on the 10th trading day of February you bought a July crude oil contract and held that contract for 60 trading days, you would have made money in 24 of the 28 years, for an 85.71% success rate.
2. Short Silver (NYSEARCA:SLV) - From 1973 to 2011, if on the 13th trading day of February you shorted the May silver contract and held that contract for 45 trading days, you would have made money in 29 of the 39 years, for a 74.36% success rate.
3. Long Natural Gas (NYSEARCA:UNG) - From 1991 to 2011, if on the 16th trading day of February you bought the July natural gas contract and held that contract for 41 trading days, you would have made money in 16 of the 21 years, for a 76.19% success rate.
If these trades excite you enough to want to open a futures account, I would first like to point out something regarding silver. While this trade has been quite successful over time, when it wasn't successful, it really wasn't successful. Case in point: 2011. This trade was absolutely devastated last year. In fact, the losses from 2011 were so bad, that if it weren't for the massive gains resulting from shorting silver right at the end of the Hunt brothers cornering the market in 1980, the trade, despite working nearly three out of every four times, would be a money loser. It's an example of why an exit strategy or a hedge on a position can be vitally important when taking part in the markets.
Despite silver's meteoric climb in early 2011 annihilating multiple decades of profits on the seasonal short trade, oil's seasonal play is one that has worked brilliantly, without any major hits to profits. With nearly an 86% success rate, including eight straight and 13 out of 14 years of success, the largest of the four losses from this trade is actually less (22% lower) than the average annual gain from the trade during its 24 winning years.
Natural gas, while also quite the successful trade, has experienced a rough ride over the past few years. Three of the five down years occurred recently (2007, 2009, and 2010). Although, when factoring in the massive gains from 2008, the 2007 to 2010 time period is essentially a wash.
If the volatility and leverage involved in the futures markets are not for you, but you want exposure to the seasonality, consider looking at equities involved in oil, silver, and natural gas. It should be noted that investors should not rely on equities to always correlate well to the underlying commodity with which the company is involved. Sometimes this will work in the favor of the equity investor, and sometimes it will not. Also, given that the seasonal trade was noted using futures data, the equity investor might have to vary the entry and exit dates slightly.
While there are many different companies exposed to the three commodities mentioned in this article, some examples include the following:
Silver Wheaton (SLW) - This silver streaming company, as a proxy for silver futures, has outperformed the precious metal since 2006 during the seasonal trade. During the mid-February to mid-April trade, SLW experienced gains in 2006 (when the silver trade was down a lot), 2007, 2010 (when the silver trade was again down a lot), and 2011 (when the silver trade got crushed). In 2008 and 2009, SLW experienced relatively flat returns during the seasonal period.
Chesapeake Energy (NYSE:CHK) - This natural gas operator focused on "discovering and developing unconventional natural gas and oil fields onshore in the U.S." has also outperformed its related commodity during the seasonal trade since 2006. CHK experienced gains in the trade during 2006, 2007 (when natural gas was down), 2008, and 2009 (when natural gas was down a lot). In 2010, a year of large seasonal losses for natural gas, CHK experienced flat to relatively small losses depending on the timing. In 2011, the returns were flat for CHK versus gains for natural gas.
Exxon Mobil (NYSE:XOM) - This energy giant's returns during the seasonally strong period for crude oil was not impressive relative to the commodity's returns. From 1984 to 2011, crude oil's three strongest years of returns during the February to May trade were in 2006, 2008, and 2009. For XOM, however, 2006's trade was flat, and 2008 and 2009 registered gains and losses respectively. Crude oil's average-like returns in 2007, 2010, and 2011 were matched by XOM with gains in 2007 and flat returns in 2010 and 2011.
Valero Energy (NYSE:VLO) - Since 2006, this refiner and marketer of petroleum outperformed XOM when it came to the seasonal trade relative to crude oil. VLO registered strong gains during the 2006 and 2007 seasonal time period, strong losses in 2008, a flat 2009, further strong gains in 2010, and a flat year in 2011.
As previously mentioned, if you are interested in executing this seasonal commodity strategy using equities, there are many different companies worth exploring. Silver Wheaton, Chesapeake Energy, Exxon Mobil, and Valero Energy were chosen only for illustrative purposes. I did not look back further than 2006 to see how each of these equities performed during the seasonal trade. If you are interested in gathering this data, an additional piece of information worth exploring for comparison's sake would be the performance of the S&P 500 SPY during those time periods.
It should also be noted that events in Europe and the Middle East could throw a serious curve ball to any type of seasonality this year. With this in mind, please remember to always have an exit strategy, especially when trading commodities as volatile as crude oil, silver, and natural gas.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: I am long silver.