With all of the turmoil in the Middle East one might naturally expect energy prices to be soaring at the moment.  But they are not.  If you followed seasonal trends in the financial markets (and I’m guessing that you don’t) then you would not be surprised (and I’m guessing that you are) that energy futures and energy stocks are falling sharply at the moment.  So what gives?  In a word, “seasonality”.

Two Unfavorable Periods for Energy Stocks

For our purposes we will use Fidelity Select Energy Services (ticker FSESX) as a proxy for energy stocks and will look at two seasonally “unfavorable” periods:

-The first seasonally unfavorable period extends from the close of September Trading Day #10 (in this case, September 17, 2012) through the close of October Trading Day #6 (October 8, 2012).

-The second seasonally unfavorable period extends from the close of November Trading Day #2 (in this case, November 2, 2012) through the close of November Trading Day #14 (November 20, 2012).

The performance of FSESX during these two periods since 1988 appears in Figure 1

Figure 1 – FSESX % +/- during Seasonally Unfavorable Periods

For the September Trading Day 10 through October Trading Day 6 period:

-# times UP = 9

-# times DOWN = 15

-Average % loss = -3.7%

-Median % loss = -2.4%

For the November Trading Day 2 through November Trading Day 14 period:

-# times UP = 7

-# times DOWN = 17

-Average % loss = -2.9%

-Median % loss = -1.6%

From these results it is important to note that it is not as though energy stocks are “guaranteed” to decline during either of these time frames.  Still, all told:

-# times UP = 16

-# times down = 32

-# times UP 10% or more = 1

-# times DOWN 10% or more = 9

So historically these periods have witnessed a decline in energy stock prices 2 out of 3 times, and the vast majority of big moves (i.e., 10% or more) have been to the downside.

A Picture is Worth A Thousand Words (and Potentially Thousands of Dollars)

Now let’s assume that an investor had been unlucky or unwise enough to only invest in FSESX during our two unfavorable periods every year since 1988.  How would this have worked out?  The not so happy results appear in Figure 2.

Figure 2 – Growth of $1,000 invested only during Sep TD10 to Oct TD 6 and Nov TD 2 through Nov TD 14 periods since 1988

Despite the fact that energy stocks managed to advance a third of the time, the net result of investing in FSESX only during the two unfavorable periods would have been a disastrous loss of -83% from 1988 to the present.

Now let’s look at the flip side.  Let’s suppose that Investor A had held FSESX on a buy-and-hold basis since 1988, while investor B would hold FSESX all the time except for our two unfavorable periods, during which time he would switch to cash.  The comparative results appear in Figure 3.

Figure 3 – Growth of $1,000: Buy and Hold (red line) versus Switching Strategy (blue line) using ticker FSESX

-The buy-and-hold investor would have seen his $1,000 investment grow to $11,493 (+1,049%).

-The “two time a year switcher” would have seen his $1,000 investment grow to $67,776 (+6,678%).

Quite a difference, no?

One Technical Note

It should be noted that Fidelity has switching restrictions which would actually preclude using ticker FSESX with this strategy (don’t you just love this business?).  The good news is that there are plenty of alternatives including:

IEZ – iShares Oil & Gas ETF

OIH – HLDRs Oil Service ETF

RYVIX – Rydex Energy Services mutual fund

OEPIX – Profunds Oil Equipment & Services mutual fund

Summary

So can we be certain that energy stocks are headed for tough times over the better part of the next two months?  Not at all.  Still, history suggest that if something “big” is going to happen in energy stocks, it won’t be to the upside.

As always, time will tell.

Jay Kaeppel

Staff Writer and Trading Strategist

Optionetics.com ~ Your Options Education Site