What’s Hot in August
Geoffrey A. Smith
Chief Instructor, Diversified Trading Institute (DTI)
Most have heard that when in May, go away. This statement points to the equity (stock) markets, which suggests that the equity markets turn flat to weak during the summer months due to kids getting out of school and families going on vacation. This may be true, but other markets have a tendency to gain strength in the middle of the summer time. Take the grains for instance. Grains hit the harvest lows in June and July, and have a seasonal uptrend in August into October. At harvest, we have a huge supply, and then reality sets in that it has to last until next year when we can get a new harvest. This pushes these markets higher, usually, unless we have an over abundance for a couple of years in a row.
In the energy markets, oil continues to have, let’s say, price support. It does not rally during August, but will float higher due to continued demand for the remainder of the summer. On the other hand, natural gas, which is used more in winter rather than summer, comes off its seasonal lows and, like grains, will rise from August through October as demand steps in to fill the reserves for the winter months ahead. A good play on this would be UNG (United States Natural Gas ETF). Notice in the chart below that UNG has been in a down trend since the middle of June. This correction gives us a buying opportunity going into August as demand shifts. One way of playing it may to be selling $20 puts, acquiring the stock and selling calls against it.
And speaking of hot, what about coffee? Notice that it too has been in a decline since April. This is due to the Brazil harvest, and as roasters build inventory to get ready for the winter months, coffee has a tendency to bounce up in August into September. Again, look at the chart below and notice it is starting to form a bottom. Starbucks (SBUX) or JO (coffee ETF) may be a way of playing the coffee trade. Maybe the 77.50 puts in SBUX or the 32 puts in JO. I’ll let you decide.
Grains, energies, and softs. Though, not your typical markets to trade, but these markets give us an opportunity to look elsewhere when the equity markets are hanging out at the beach for the summer. And if you think about it, these are products we use almost every day, so this will give you an opportunity to hedge the utility bills, or that next bag of groceries you are going to pick up this weekend.
And, yes, here it comes…past performance is not indicative of future results. Just remember that trading does involve risk and you can lose money. But if we stay with the trends, we should be on the winning side. Good luck trading!