Certain trends can be seen when examining the long-term charts of individual financial instruments. These are not the traditional technical analysis graphical formations, though; instead, we can discuss the impact of seasonality. Although some commodities are likely to exhibit these trends the most, some trends in investor behavior over time can also be identified, such as in the stock markets.

For some commodities, this seasonality is manifested, among other things, by the fact that in the long term their price may move within certain limits, which helps more experienced traders to better predict price movements.

Seasonality, cycles and trends

Seasonality, cycles, and trends should not be confused. Seasonality is influenced by shifts in supply and demand between seasons and happens at specific times, typically within the same year. Cycles can continue for any amount of time and are impacted by various variables.

Frequent ‘disruptors’ of seasonal rhythms can include weather variations or natural calamities. Seasonal patterns may have been significantly impacted in recent years by the COVID-19 pandemic, but geopolitical factors like the ongoing crises in the Middle East and Ukraine must also be taken into consideration. Nevertheless, such occurrences have a limited effect that progressively fades over time.

While changes in consumer behavior and preferences, fashion trends, and other factors have a big influence on costs, technology advancement and innovation can occasionally cause changes in seasonal patterns. These one-way shifts in supply and demand may permanently impact some seasonal patterns, which can also have long-term effects.

The wheat price’s seasonal fluctuation prior to 2022 and its sharp rise following Russia’s invasion of Ukraine are depicted in the image below. The event’s effects subsequently lessen throughout the course of the next year, and the commodity’s price once more exhibits seasonal fluctuations.

Energies

For both oil and gas, seasonality has a comparatively significant effect on the price of energy commodities. The summer months, when demand for gasoline rises sharply, have a considerable impact on the price of oil, particularly North American oil (WTI). The price of oil tends to increase during the summer months since a significant portion of the US population travels for holidays and Independence Day.

In a similar vein, the cost of natural gas climbs during the summer, particularly during really hot years, as air conditioners use a lot more energy. Due to the strong demand for the commodity for heat generating, the price of gas also increases during the winter months when low temperatures are predicted. Although the demand for heating oil, a product of crude oil, tends to increase during harsh winters, the price of crude oil is not much impacted.

Gold

Commodity markets are where seasonal effects are most frequently observed. The most popular instrument among TradeXProp traders, gold, for instance, has historically experienced price spikes in the summer and winter, or before the year ends. In the first instance, India, one of the biggest buyers of gold, is seeing an increase in demand for the metal. This is due to the fact that it is the busiest time of year for weddings in this most populous nation, and no Indian wedding would be complete without gold gifts. Thus, about half of India’s demand for gold is met during the wedding season, which naturally has a big influence on the commodity’s demand.

The second peak in gold occurs at the end of the year, around Christmas, when demand for gold rises throughout the majority of the western world. There is no doubt about any seasonality in gold this year, as its price has broken new records nearly every week. This is because gold has also served as a safe haven throughout periods of geopolitical unpredictability over the past year.

Agricultural commodities

Farming commoditiesIn agricultural commodities, where crop planting and harvesting are crucial, seasonality has a comparatively significant impact. Old crops that were collected during the previous harvest are available on the markets throughout the months when new crops are grown or planted, and the supply is reduced. The supply on the markets rises throughout the harvest months as new crops are reintroduced.

Therefore, even if maturity and delivery date affect futures market pricing (longer delivery dates are more costly due to storage expenses, etc.), seasonal factors somewhat defy this logic. Contracts with closer delivery are more expensive when the old crop is on the market and supply is limited, whereas contracts with the new crop are less expensive when the crop is harvested and available.

This seasonality is evident in the fact that most crops are only harvested once a year, which causes prices to drop during harvest and then rise again as supply declines and inventories are accumulated for the following harvest. When the market is most apprehensive about the next harvest and potential production swings, the price peaks during the sowing and planting season.

Stocks

Certain seasonal influences are also discernible in stock markets, and certain trends have even been given names of their own. The January impact is associated with the increase in stock prices at the start of the year, and it happens that growth equities do better than value stocks, among other things. Price increases are a result of portfolio rebalancing, in which big investors restock their holdings after selling their losing titles at the end of the year. This phenomena might have something to do with ordinary investors searching for ways to park their money after year-end bonuses.

The fact that there is little market activity and that prices are range-bound and don’t rise much during the summer may be the reason for selling in May and leaving. This effect is irregular, though.

The Halloween effect is based on the observation that stocks do well in the months after the end of the summer. This might have something to do with the fact that the markets are “alive” once more and investors are feeling upbeat following the holidays and summer. In turn, the Santa Claus rally can be connected to investors attempting to get ready for the previously mentioned January rally or to big investors and funds purchasing lucrative securities to bolster their portfolios (window dressing).

An intriguing change in approach is the use of seasonal factors in trading and investment. However, it should be acknowledged that seasonal patterns are not a perfect tool and must be viewed in their proper perspective. Although they can be an effective tool for confirming entry or exit signals in trading, a trader’s approach shouldn’t be based solely on them.