Summer is the Perfect Time to Prepare for Winter in Markets

The temperatures in the United States have been soaring this summer. It is hard to think about winter when the sun is beating down on our heads, but this is the perfect time to begin positioning portfolios for the 2024/2205 winter season.

Seasonality can be powerful in markets across all asset classes but is particularly significant in commodities. During summer, gasoline prices tend to reach seasonal highs as drivers put more mileage on their cars during vacations. Grain and oilseed prices tend to be more volatile as the weather during the growing season in the Northern Hemisphere determines the annual crops and whether shortages or gluts develop. Animal proteins tend to reach elevated levels as the peak grilling season runs from late May through early September, when BBQs operate overtime.

Markets are now in the heart of the summer but fall and winter are on the horizon. Market sentiment is critical for asset prices’ path of least resistance. Sentiment reflects the future price path, making the summer the perfect time to position for the winter.

Natural gas prices tend to reach seasonal highs during winter

• Natural gas is one of the most volatile futures markets.
• Natural gas futures have traded from below $1.50 to over $10 per MMBtu since 2022.
• The 2024/2025 peak demand season begins in Q4 when inventories decline as heating demand increases during winter.
• Natural gas tends to rally in late fall and early winter as temperature uncertainty and heating demand peak.

Oil prices often decline during the coldest months- Heating oil is an exception

• Gasoline is the most ubiquitous oil product.
• Gasoline demand tends to peak during the spring and summer as drivers put more mileage on vehicles.
• Gasoline prices reach seasonal lows during winter, weighing on crude oil demand and prices.
• Heating oil is a year-round fuel, and prices often peak in winter.

Stocks have experienced significant volatility during the fall

• Some of the most dramatic stock market declines have occurred in September and October.
• The September Effect can cause sentiment to turn negative.
• The October Effect describes the anticipation of financial declines and stock market crashes.
• The Bank Panic of 1907, the 1929 Stock March Crash, and Black Monday in 1987 have made October a scary month for the stock market.

Preparing for the 2024/2025 winter with a plan

• Seasonality can be a powerful force in markets across all asset classes.
• Scaling into seasonal risk positions during the hottest days of summer can pay significant dividends during the coldest days of winter.
• Leave plenty of room to add on a scale-up or scale-down basis- Do not put all your investment or trading eggs in one risky basket.
• Discipline and a risk-reward plan are critical success factors when developing a seasonal trading or investment plan.

2024 is no ordinary year- Lots of uncertainty on the horizon

• Markets reflect the economic and political landscapes.
• The November U.S. Presidential election will determine policies over the coming years.
• President Biden’s debate performance damaged his chances of another term.
• Democrats could turn to another candidate at the August convention.
• Former President Trump has risen in the polls but faces significant legal and other challenges. Last weekend’s assassination attempt has increased the tensions surrounding the upcoming election.
• Uncertainty remains at a record high, and markets despise uncertainty.
• Half the country will be disappointed with whoever wins the November election.

The coming fall and winter seasons always create trading and investment opportunities. In 2024, the U.S. domestic political landscape and the geopolitical landscape with wars in Ukraine and the Middle East remain highly volatile. Uncertainty increases volatility, creating a paradise of trading opportunities. However, high price variance is a nightmare for passive investors. Trading instead of investing could be the optimal approach for the coming months.

Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!