- The S&P 500 index tends to move lower during August and September, so this year's selloff isn't as dramatic as the Chicken Littles of the industry make it sound.
- On the other hand, live cattle tend to post a seasonal low in late August. It will be interesting to see what happens this year given the high price of the market.
- December corn also tends to post a low weekly close in late August. If a contra-seasonal selloff similar to 2013 happens it will be due to a change in real fundamentals.
As we head toward August’s finish line, a number of markets are nearing or have just moved into normal seasonal turns. Before we get rolling, the question that tends to come up at this point is, “What is seasonality?” Based on individual fundamentals, markets tend to move in cycles over the course of year. In financial markets I use a calendar year, while in livestock I use twelve months based on the nearby futures contract. In grains, as much as I’ve grown to dislike the concept, I generally use the standard marketing year. The next item I want to point out is I don’t use price to compare the current year to history, but rather indexes. Why? If we just use this year’s price compared to previous years’, and we find ourselves in a time of strong inflation or deflation, the seasonal study flattens and becomes unusable. By using an index, I measure the percent of an annual average a market moves from week to week, or from cycle to cycle. Simple enough, right? So without further ado, let’s take a look at three key markets coming up on turning points this month.
On the X-site (that sounds so dirty) formerly known as Twitter, one of the gentlemen I follow in my Markets list mentioned the seasonality of the S&P 500 Index ($INX). This as the Chicken Littles of financial media are running around squawking about how the sky is falling, Armageddon is upon us, and so on. Yes, US stock indexes have fallen back this month but as I talked about before, there was a good chance they would. A look at my seasonal index for the S&P 500 shows the 5-year, 10-year, 20-year, and 30-year seasonal indexes all move lower to different degrees from the second weekly close of August through the last weekly close of September. Historically, the 5-year index shows a drop of 5%, the 10-year 3%, the 20-year 2%, and the 30-year 1%. During 2023 the S&P 500 posted a high weekly close of 4,582.23 the last week of July (within the timeframe, since we are working with averages) putting the seasonal downside range between 4,536 (1%) and 4,353 (5%). The S&P 500 closed Thursday at 4,370.36.
Live cattle has a number of contracts we can pick from, but given the seasonal rally in the market tends to run from the last weekly close of August through last January, I’m going to use the February futures issue (LEG24). Here my timeframe runs from the first weekly close the previous February though the last week close of January. Both the 5-year and 10-year seasonal indexes show a normal secondary low weekly close the last week of August (this year that would fall on Friday, September 1). The 5-year index shows an average gain of 5% through the end of its year while the 10-year shows the contract adds an average of 4%. For argument’s sake let’s say Feb live cattle finish this month near $180. If so, then the seasonal upside target area would be $187 (4%) to $189 (5%). Those in the industry will recognize this is below the contract high of $191.75. We have other filters to use when it comes to analysis, with one being price distribution. The bottom line is the live cattle market in general is priced at an historically high level, possibly limiting new buying interest.
You might’ve heard of the third market I’m going to talk about, for it’s been in all the papers. But seriously, it seems everyone wants to talk about December corn (ZCZ23) these days. I’ve had folks ask if the Dec23 issue can get back to $6, while I’ve also raised the discussion of cash corn possibly falling back into the $3 range. Dec corn’s 5-year index shows the seasonal low weekly close to be the third week of August, this week, with the 10-year index following a couple weeks later with its low weekly close the first week of September (again, Friday, September 1 by the 2023 calendar). Technically, Dec23 is in position to complete a bullish technical reversal on its weekly chart this week, indicating its intermediate-term trend has turned up. However, from a fundamental point of view it could be difficult to get bullish the Dec corn contract given the US looks set to harvest a record crop over the coming weeks. Again, while I don’t believe in analogous years, the 2020 to 2023 time frame has closely followed the path laid out from 2010 through 2014, with the Dec 2013 contract posting its low weekly close the second week of November (2013). Dec23 remains a tossup for me as I’m torn between my technical and fundamental analysis. The deciding factor will likely be the third school, analyzing algorithms.
Lastly, a reminder that seasonal analysis is not cut and dried, but rather a guide to use to better understand the risk of a position. In Newsom’s Rules, seasonality is one of the filters mentioned in #3: Use filters to manage risk (along with price distribution and volatility). Also, when we see contra-seasonal moves it tells us something out of the norm has happened with fundamentals. But that’s a subject for another day.
On the date of publication, Darin Newsom did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
