Setting Up for the Seasonal Trade in the Canadian Energy Sector
The Canadian 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/TSX Energy Index has a period of seasonal strength from February 25th to May 9th. The trade has been profitable in 14 of the past 15 periods. Average return per period was 13.7 percent.
The period of seasonal strength in the TSX 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 fourth quarter results, results from the winter drilling season, annual reports, annual meetings and annual revisions to reserves.
Seasonality by 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 from February 25th to May 9th based on the past 10 periods:
Stock Frequency of Average Return
| Stock | Profit out of 10 | Avg. Return % |
| Nexen | 7 | 12.3 |
| Imperial Oil | 8 | 6.7 |
| Penn West Energy | 8 | 8.8 |
| Husky | 8 | 11.1 |
| Suncor | 9 | 15.5 |
| Cdn. Natural Res. | 9 | 19.4 |
| Encana | 8 | 14.8 |
| Talisman | 8 | 12.7 |
| Cdn. Oil Sands | 8 | 16.0 |
Technical Influences
The TSX Energy Index currently does not have an attractive intermediate technical profile. The Index recently broke support at 273.30 and established an intermediate downtrend. In addition, the Index recently closed below its 200 day moving average. Strength relative to the TSX Composite has been negative during the past month.
The TSX Energy Index is short term oversold on the charts. Moving Average Convergence Divergence (MACD) is oversold, but continues to trend down. Relative strength Index (RSI) also continues to trend lower, but is more oversold now than last February. Stochastics recently fell below 20% and are showing early signs of bottoming.
Crude oil’s period of seasonal strength from mid February to mid May has appeared earlier than usual this year. Short term momentum indicators began to recover from oversold levels last week.
In conclusion, technicals for the energy sector appear to be bottoming at an oversold level and energy stocks and Exchange Traded Funds are lining up for a seasonal trade.
Fundamental influences
Fourth quarter reports released by companies in the sector to date have been greeted unfavourably by the market. Stock prices quickly moved lower on news. Cash flow and earnings by companies such as Imperial Oil, Talisman and Suncor were significantly lower in the fourth quarter compared to the same period last year and were lower than consensus estimates. Other major Canadian companies are scheduled to release fourth quarter results next week.
And now the good news! Colder than average weather this year is helping the sector. In addition, cash flow and earnings on a year-over-year basis resume a strong upward trend beginning in the first quarter of 2010 thanks mainly to a doubling in crude oil prices from their lows in December 2008.
The Bottom Line
The seasonal trade in the Canadian Energy sector is approaching. Be prepared to enter the trade when short term technical indicators turn positive. Possible Exchange Traded Fund candidates for the trade include iShares TSX Energy Index (XEG), Claymore Oil Sand Sector (CLO), BMO TSX Equally Weighted Oil Index (ZEO) and Horizons BetaPro TSX Bull + ETF (HEU)
Disclaimer: Article originally published by Tech Talk author, Don Vialoux, in the National Post. Comments and opinions offered in this report at are for information only. They should not be considered as advice to purchase or to sell mentioned securities. Data offered in this report is believed to be accurate, but is not guaranteed.
| Sponsored By... |
|
