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Time to lighten up on your energy exposure

The second of two periods of seasonal strength in the energy sector has ended. Thackray's 2012 Investor's Guide notes that the average optimal time to own the sector is from July 24th to October 3rd. A trade in the S&P Energy index and the S&P/TSX Energy index has been profitable in 10 of the past 15 periods.

The energy sector has another period of seasonal strength from January 30th to April 13th. The latter time frame historically has been more reliable and more profitable than the July-October period.

Between the July-October period and the January-April period, energy prices and energy equity prices enter into a "shoulder" season between summer and winter when demand for energy and energy prices historically have weakened.

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Once again, the July 24th to October 3rd period of seasonal strength has been profitable. Since recommending the sector in this column on July 23rd, the S&P/TSX Energy index has gained 8.7 per cent and the S&P Energy index has advanced 7.0 per cent.

On the charts, the S&P/TSX Energy index had a positive technical profile until recently. In late July, the index broke above a classic reverse head and shoulders pattern on a break above 245. The index slightly exceeded its target price of 272 based on the pattern. However, signs of technical weakness have surfaced recently. Short-term momentum indicators are trending down. Strength relative to the S&P 500 index and the TSX composite index turned negative last week. Preferred strategy is to take seasonal profits at current or higher prices.

A word of caution. Anticipation of third-quarter earnings reports by companies in the sector to be released in late October are not expected to help equity prices. On average, earnings by major companies in the sector are expected to decline by more than 20 per cent on a year-over-year basis.

A wide variety of exchange traded funds in the energy sector as well as crude oil, natural gas and gasoline are available on North American equity exchanges. U.S. exchanges list 30 Energy ETFs. A list is available here. Another 24 U.S.-based ETFs trade oil, gasoline and natural gas. A list is available here.

The most actively traded U.S.-listed ETF, the Energy Select Sector SPDR, gained 8.6 per cent since the close on July 20th.

Canadian exchanges list seven energy equity ETFs and 11 oil and natural gas ETFs. The most actively traded Canadian equity ETF, the iShares S&P/TSX Capped Energy Index, has gained 9.0 per cent since the close on July 20th.

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Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. He is also a research analyst at Horizons Investment Management, offering research on Horizons Seasonal Rotation ETF (HAC-T). All of the views expressed herein are his personal views although they may be reflected in positions or transactions in the various client portfolios managed by Horizons Investment. Horizons Investment is the investment manager for the Horizons family of ETFs. Daily reports are available at http://www.timingthemarket.ca/

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About the Author

Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. He is also a research analyst for JovInvestment Inc. Reports are available at www.timingthemarket.ca and www.equityclock.com. Follow him on Twitter @EquityClock. More

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