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Energies
January is normally the coldest month of the year. Nonetheless, heating
oil has nearly always been lower in mid-February than in early January
- albeit a few times with sharp drawdowns, perhaps the result
of unexpected cold snaps. While retail consumption is at its heaviest,
refiners and distributors aggressively liquidate inventory through
the end of the heating season. Thus, the March contract, for instance,
tends to make its seasonal lows just prior to expiry.
Even as the heating season wends it way through peak consumption,
the wholesale market for gasoline senses its first stirrings of demand
for the upcoming
driving season. Although the acceleration in demand, driven by inventory
accumulation, does not usually get underway until March, the seasonal
low for May Gasoline has often come as early as mid-December. This
strategy suggests another potential opportunity to probe for a favorable
price low.
Retail consumption of natural gas peaks twice
yearly - during heating and air-conditioning seasons. But regional
distributors accumulate inventories well before both peaks. For the
heating season, prices tend to peak by October/November and then decline
into winter. Oddly enough, that allows distributors in regions of
heavy air-conditioning use to price supply for summer.
Liquidation pressure on futures contracts tends to be relieved coincident
with expiration of the February contract late in January. Though
perhaps sometimes more short-covering than aggressive accumulation,
it has been at least a reliable market bounce.
Metals & Forex
The US dollar has often found a bottom coincident with the new year. The
Swiss franc, for example, has typically declined at least into March,
and especially from late January into mid-February. Traders will
want to be wary this year of the potential for a double bottom in
the franc, completed with a decisive penetration of .6400 in the March
contract (see monthly chart).
Gold and silver have tended to follow divergent paths in the new year.
Silver, for example, has been higher in early February than in early
January for the last 10 years consecutively - in only 3
of which would any daily closing drawdown have even reached
3 cents/oz.
Conversely, gold has been lower in mid-March than in the last week
of January for the last 17 years
consecutively - in only one of which would any daily closing
drawdown have exceeded $9.30/oz. Indeed, gold has been lower (between
these published dates) in 21 of 22 years since gold peaked in January
1980!
Softs
Florida, the largest US producer of orange juice, begins production
in January - the month during which the crop is most vulnerable
to freezes. But the market tends to run higher beforehand as it builds
risk premium into prices. As supplies are processed and grow, risk
also decreases - much like time decay for an option.
With 80% of the new cocoa crop harvested by March, prices tend to
decline into deliveries against March futures. This strategy may
well represent a final burst of speculative liquidation. The activity
in this year's market suggests crop problems, however, so traders
must be wary.
Fibers
Cotton, harvested by the end of the calendar year, has tended to bottom
by no later than late January when mill consumption revives. The
lowest prices in decades may also create the best demand in years.
The lumber market turned quiet at the end of the construction season. But
prices tend to rise into February/March as inventories are accumulated
for the next building season - even as rainy winter weather in
the Pacific Northwest slows timber harvest. The May contract has
been higher in mid-February than in mid-January for the last 15
years consecutively.
Grains & Soy Complex
The typically most prominent feature is the onset of weakness associated
with the "February Break." Producers, prohibited by weather
from working fields, take advantage of the new tax year to convert
grain to income pay taxes, make land payments, and prepare for the new crop
year. Grain supplies build in local elevators, however, because winter
weather slows transportation (inland rivers freeze and flood) and
clogs the distribution network. Supplies deliverable against March
futures then build.
Adding to pressure on soybeans is the new Brazilian crop, which is
usually "made" in early/mid-February. In addition, demand
for soymeal, normally constituting about 65% of product value, declines
ahead of the reduced summer consumption. Pressure on wheat comes
as Argentina and Australia harvest a new crop.
Meats
With pork production still heavy and February the first new-crop pork
bellies contract, deliveries against it tend to be heavy. Thus, the
market has normally been pulled lower into February's last few days
of trading.
Traders will want to be cautious, however, because hog futures tend
to trend higher. Even while slaughter remains heavy, the market has
usually anticipated the seasonal decline of slaughter into June/July.
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