The Seasonal Trade in the U.S. Energy Sector
The U.S. energy sector has a history of moving higher from February to May each year. Will the seasonal trade work this year?
Seasonal influences
The S&P Energy Index has a period of seasonal strength from February 25th to May 9th. The trade has been profitable in 24 of the past 26 periods. Average gain per period was 8.9%. The Index outperformed the S&P 500 Index by an average of 5.6% per period
The period of seasonal strength in the S&P Energy Index coincides with the period of seasonal strength in North American gasoline and crude oil prices. Other annual recurring news events that favourably influence the sector during this period include seasonally strong first quarter results, annual reports, annual meetings and annual revisions to reserves.
Seasonality in key stocks in the sector varies significantly. The following table shows the frequency of profitable trades and average return per period for key energy stocks in the S&P Energy Index from February 25th to May 9th based on the past 10 periods:
Stock Frequency of Return Average Return Per Period (%)
Exxon Mobil 5 2.00
Chevron 9 8.12
Occidental Petroleum 9 14.84
ConocoPhillips 9 7.24
Apache 7 11.97
Anadarko 10 57.19
Devon Energy 9 13.34
XTO Energy 9 10.87
EOG Resources 9 21.61
Marathon Oil 9 10.24
Technical Influences
The S&P Energy Index currently has an improving short and intermediate technical profile. The Index recently bounced from its 200 day moving average. Short term momentum indicators have bottomed. Stochastics recently moved above the 20% level. Relative Strength Index recently recovered from the 30% level. Moving Average Convergence Divergence last week recorded a short term buy signal by completing a positive crossover from an oversold level. Strength relative to the S&P 500 Index turned positive at the beginning of February. Support is forming at 397.67. Resistance is at 455.52.
Chart courtesy of StockCharts.com www.stockcharts.com
Seasonal strength in crude oil and gasoline from mid February to mid May has appeared earlier than usual this year. Short term momentum indicators for both commodities improved significantly last week. Both recorded short term MACD buy signals.
Fundamental Influences
First quarter earnings for most companies in the sector will turn positive on a year-over-year basis mainly because of higher crude oil prices. Crude oil has gained substantially from an average of $46 U.S. per barrel in the first quarter last year. Moreover, estimates likely will increase due to recent gains in crude oil prices. Following are first quarter consensus earnings per share estimates for major oil companies in the sector compared to results last year:
Company First Quarter EPS 2010 First Quarter EPS 2009
Exxon Mobil $1.33 $0.92
Chevron 1.71 0.72
Occidental Petroleum 1.35 0.50
ConocoPhillips 1.35 0.56
Apache 1.95 0.82
Anadarko 0.32 (0.53)
Devon Energy 1.24 0.67
XTO Energy 0.86 0.68
EOG Resources 0.55 0.53
Marathon Oil 0.62 0.34
What to do
The U.S. energy sector recently entered into its annual period of seasonal strength. Exchange Traded Funds that track the U.S. energy sector include Energy SPDRs (Symbol: XLE), iShares U.S. Energy Sector (Symbol: IYE), Vanguard Energy VIPERs (Symbol: VDE) and SPDRs Oil and Gas Exploration and Production (Symbol: XOP).
Stocks mentioned in this post: VDE
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