Radio: How to Use Seasonal Tendencies in Commodities Featuring Jerry Toepke
Michael: Hello everybody. This is Michael Gross, of OptionSellers.com. I’m here with our monthly guest expert series. This month’s guest expert is Jerry Toepke, of Moore Research Center, that’s MRCI.com. For those of you who read our book and followed some of the seasonal charts, in the book, Jerry is the man behind those charts. He works heavily with Moore Research in their seasonal research. He does a lot of the price comparisons, coming up with the charts you see and I think he’s going to have some great information for you here today. Jerry, welcome to Option Sellers Radio.
Jerry: Thank you, Michael, good to be here.
Michael: Jerry, to get started, why don’t you start by telling us a little more about Moore Research and what you guys do over there.
Jerry: Okay, at Moore Research Center, we’re a small research company situated on a 73 acre ranch, a hillside ranch, about 8 miles outside of Eugene, Oregon. We actually started out as a computer research facility for a major commodity firm back in the late 80’s and early 90’s. That kind of evolved into a separate independent research firm here where our stock in trade basically is seasonal analysis of futures markets in the publication era.
Michael: Okay, great! Now as far as your position there what do you do at Moore Research?
Jerry: Well, my official title is Editor, but I’m kind of an analyst, a researcher, and basically all around gopher is pretty much my position. Again, we’re a small firm. We can be light on our feet, we can move quickly. Everybody kind of pitches in and tries to help with everything else. So we’re a small team.
Michael: Okay. Now as far as your background or how you got into this field of study, studying seasonals, what was your journey to get there?
Jerry: Well, I grew up on a farm in central Illinois, so I was pretty familiar with corn and soybeans and wheat and cattle and hogs and those kind of markets. When I was little, I remember my father would load up our truck with cattle and we would haul them up to the Chicago stockyards. I even remember him taking me to the old Chicago Mercantile Exchange when they were still doing prices on chalkboards. That was one of my earlier memories there. So anyway, after going to school in Chicago, to college, why there was the calling for me to go west, young man, and so I actually moved out to Oregon for several years and then my father, who had dabbled in the commodity market for years and actually did quite well in the early 70’s, mid 70’s commodity boom, thought maybe this might be something I would like because I was good at math and I enjoyed numbers and he thought maybe this would be something that I could help him with. So I went back to Illinois, learned the business, did some trading, became a broker, but then I found out about Steve Moore and his research and I loved the idea of research and analyzing. So it gave me a chance also to come back out to Oregon, where I owned some property already, get involved in research. And again, we did some brokerage in the early 90’s and then turned into the independent computer research firm we are today. I’ve enjoyed it ever since.
Michael: That’s a fascinating journey. So you have a pretty good foundation for what you’re doing, growing up around these types of products, working in the industry and I guess that probably helped in giving you a little bit of insight into the actual products you’re studying.
Jerry: Yeah, it gives me some perspective, again some fundamental background we as a company don’t really deal in fundamental analysis, but our research depends on market responses to fundamentals, so it helps us to know the more fundamentals, underlying fundamentals that we know to a market, the better off we are in being able to analyze the seasonal tendencies, is maybe the best way I could put it.
Michael: Yeah, I think that’s one of the most fascinating parts of your website. I think it’s in your subscription service, that you do provide in different months, little summaries of why these seasonals are taking place, why they tend to happen in this way at certain times of the year. One of the things we often talk about is the seasonal tendencies are often times reflecting underlying fundamentals going on in the market. Would you agree with that?
Jerry: Yes, and, you know, in general I would say they always reflect some kind of underlying fundamental. The problem is, we may not always know it – what that fundamental might be. So like I say, the more you can know of underlying fundamentals of market, the better you understand it’s movement and it’s seasonal movements. Yes, fundamentals drive markets, there’s sentiment and there’s technical studies and there’s momentum trading and so on and so forth. The fundamentals overall are going to drive the market and if you can understand some basic fundamentals, I guess maybe would be my point. Then you can more readily understand it’s seasonal tendencies.
Michael: Sure, that’s a great point. Jerry, I’m going to throw a little broad question to you here. You answer it as you see fit, but for our listeners who maybe don’t understand exactly what a seasonal is and how it’s calculated, can you talk a little bit about that? How you go about defining it and calculating it, how you come up with that chart that we look at?
Jerry: Surely, or I can try certainly. Again, to me, fundamentals can tend to drive a market. A seasonal, to me, a seasonal movement, a seasonal trend, to me is nothing more than the markets own exhibited tendency, historical tendency to move in basically the same direction with a great degree of reliability and in a more or less timely manner. If it does it with a great degree of reliability it’s most likely a response to an annually recurring fundamental event or condition. An obvious example to me would be grains at harvest time. You plant corn, for instance, in the spring and it grows during the spring and early summer. It pollinates in July, so mid-July is a very critical time for corn and the market’s very anxious until it does pollinate, because pollination determines yield. Once it does pollinate, then the market, you know, that anxiety is eased, the market is more assured in the knowledge that “hey, we have a brand new crop coming”. Usually, there is very little in the way of fundamentals to stimulate much of a rally in between pollination and harvest, and harvest starts mid-September, but it’s primarily October-November for corn in the U.S. So, you tend to get from mid-July, no matter what the market has done before then, and assuming a normal year, from mid-July into harvest you tend to get a seasonal downtrend. The market starts to anticipate, anxieties relieved, the market starts to anticipate this enormous crop, which will come in September, October, or November. That’s something that’s very easy to understand. It happens over and over and over again, barring some extremely unusual fundamental overriding occurrence, be it a drought or whatever the case may be. That tends to drive a seasonal trend. Now, what Moore Research Center does is to go kind of beyond that generalized knowledge, which people in the industry have, you know, that happens year after year after year. People get all excited in July, and oh, we’re going to have not enough rain, and so forth. The industry knows that after mid-July barring something really extreme, prices probably are going to go lower. So, Moore Research Center goes a step further. So, we create a seasonal pattern for the year, which will tend to show when prices over that 15 year period, or whatever period we might be studying, but our basic is 15 years. During the year, let’s take December corn for example, during the year, when does that market tend to make a seasonal high. When do prices tend to be lowest? For something like December corn, prices tend to be lowest, say, early October when the new crop year begins. We generate a seasonal pattern. Nothing more than a graph, it’s a visual of what prices have tended to do over those 15 years. It’s not something we’re saying “this is what the market should do, this is what we think it will do this year”. This seasonal pattern, is a data based visualization of what market prices have done over the last 15 years. It’s a composite of how prices have tended to behave.
Michael: Yeah, Jerry, one thing I do want our listeners to know is that the reason the seasonals are so powerful is that they bring an element of science and Jerry makes a great point, as people get caught up in the news and is it too dry, is it too wet, and here’s some actual science you bring into it that says, look here’s the stats, here’s what’s not necessarily going to happen but maybe have a very high likelihood of happening.
Jerry: That’s a great point, Michael. We try to provide the science and we leave the art of trading to the individual trader. That’s a very good point.
Michael: Yeah, and that’s another point I wanted to address. There’s a number of ways you can use these things, a number of ways you can use these seasonals. The way we use them, Jerry, and I don’t know if you know this or not, but all we do and all, well not all our listeners, but a lot of our listeners are selling options on the contracts. So the reason they’re such a powerful tool for us is we don’t necessarily need to know what the market’s going to do tomorrow or next week, we’re only concerned with the general direction and so if we have a seasonal that shows the price tends to go down this time of year, we can just go far above the market and sell calls and so it doesn’t necessarily have to go down, it can go sideways or even move counter-seasonally for awhile and we can still benefit from that. So, if you’re an option seller, seasonals are a powerful tool that you can use, in our opinion, to really give yourself an advantage.
Jerry: I couldn’t agree more, yes.
Michael: Jerry, speaking of individual markets, you just talked about the corn market, it’s been our experience, and you correct me if you disagree with this, but it’s been our experience that a lot of the physical commodities, like energies, grains, some of the softs, they have more consistent seasonal patterns than some of the financial futures. Would you agree with that, or if not, tell me why I’m wrong.
Jerry: I would have to answer that with a definite yes and no. Again, for instance, the grains, corn, wheat, and soybeans, tend to be obvious candidates. You have harvest and you have planting season and those year after year after year after year, you may get, the timing of one or the other may move a little bit, depending on conditions but those recur every single year without question. But, you also, once every 5 years, once every 8 years, once every 10 years, you will get something like an overriding fundamental, like a drought condition. Or I remember back in the 80’s, the grain embargo – something like that. That will throw, when you get a truly unusual condition, and that’s usually what it takes to override a solid fundamental seasonal event or seasonal move, is to take something, because a seasonal really is nothing more than the norm. So, because once something like that becomes well established in the market, producers depend on it, consumers depend on it, middle men depend on it, it typically happens. You can also get, and I don’t know that it’s quite so much in the last few years has it been the case because of the zero interest rate policy, it used to be that the bonds and the notes and the Euro dollars were extremely seasonal during a particular part of the year. Interest rates tended to be seasonally highest in March, April, May. Why? Because the U.S. collects income taxes mid April. That massive transfer of financial assets from out of the private sector and in the public sector tends to tighten monetary liquidity into March, April, May. From there on out, once that’s done, interest rates have, with a great degree of reliability, have tended to ease, going down through the remainder of the U.S. fiscal year, which ends September 30th. You used to get a lot of 14 out of 15, 15 out of 15 years where bonds, for instance, would bottom by no later than mid-May and rally all the way into mid-September. The same thing with Euro dollars, the same thing with 10-year notes, and all with different paces. As that monetary liquidity went from tightened to loosened through the end of the year, those were extremely reliable. That hasn’t been quite the case recently and I suspect in part because of the zero interest rate policies. So, in currencies, probably are one of those that you might think in terms of being less reliable, and I think our statistical studies have shown that they do tend to be a little bit less reliable.
Michael: Okay, yeah, those currencies are a different ballgame. There seems to be a lot of moving part there and I agree with you. I’m much more comfortable and I think it’s much more reliable trading, you know, physical products, here’s the harvest, here’s the planting, here’s the times of year and they happen every year.
Jerry: Yes, yes, although still as with all of the commodities, you know, seasonals help you, they give you a little better understanding, maybe I should say, of that underlying market. You know, why does it tend to do something, even if you don’t trade that particular seasonal move or seasonal tendencies, it can help you understand a little bit better maybe why the market is behaving as it is.
Michael: Sure. Let’s talk, right now we are moving into springtime. There are a lot of seasonal coming into some different commodity markets. I just wanted to touch on a couple of specific markets. For instance, springtime crude oil tends to have a pretty strong seasonal this time of the year. Can you talk a bit more about that and what you say happening here?
Jerry: Sure, and again, how different this year may be I don’t know because you know we are in an extreme case with crude oil, but the underlying fundamentals during spring tend to be crude oil has two primary products, obviously gasoline and heating oil. The seasonal bulge and consumption for heating oil is during the winter, the seasonal bulge for gasoline is during the vacation-driving season of June, July and August. That is obvious to everybody. But what does that have to do with crude oil and seasonal patterns in crude oil? Well, as you come out of winter you have depleted heating oil stocks, normally. Well, maybe they are not as depleted this year because it has been probably warmer than usual; but, nonetheless, you have heating oil stocks that are normally at their annual low at the end of winter. On the other side of the coin, you have vacation-driving season coming up in, well, the traditional opening of the vacation driving-season is Memorial Day… end of May. So, in spring, once winter is over and heating oil consumption declines, refiners, you know, shut or slow down production, I should say, temporarily in March and April… April usually, so that they can make a switch over. You know, refiners have the luxury of being able to recalibrate their crack spread to maximize production of heating oil versus gasoline, or vice versa. So, during winter they are obviously maximizing production of heating oil, but in the spring in the shoulder months between the two, they will make the switch over to maximize production of gasoline to prepare for the upcoming season at the expense of heating oil, so they slow production, but during that period of time, they are busily accumulating stocks of crude oil so that when they come back online, in full production, they can operate at capacity because they are going to need, not only, to start replenishing those depleted supplies of heating oil, but they’re really going to be needing to build up stocks of gasoline, you know, because the industry is going to want them, distributors are going to want to start accumulating stocks of gasoline, because not only are our driving conditions improving during the spring, which means a little more driving, a little more consumption of gasoline, but then all of the sudden come Memorial Day, boom, the industry has got to be ready for the vacation and driving-season. School is out, you know, families get out on the road and, you know, they will drive from New York to Yellowstone or Los Angeles to Charleston or New Orleans or something like that, and they will just get out on the road you know people like to drive. There are more daylight hours, they like to get out and about. So, refiners are going to be needing to operate at capacity to replenish heating oil and meet bulging demands for accumulating stocks of gasoline. All of that drives up the price of crude oil in the spring.
Michael: Those are some great points, Jerry, and I wanted to point out one of the reasons why these can be so valuable. My colleague here, James Cordier, he has been talking about crude oil for some time now the last couple of months. He was actually on CNBC at the beginning of the year, and when everybody said crude was going to $20, and he was saying we are either at or near the bottom the thing is going to start strengthening, it is going to start strengthening, and he talked about the fundamentals, but one of the things he was referring to was the seasonal. He was relying on the seasonal, and, sure enough, the thing is back to $40 now. Everybody is trying to explain it, but they underestimate the powerful force that seasonal tendency is and just you pointing out the reasons there, I think, is some great insight to anybody listening who wants to trade crude or energy futures.
Now, you guys put out some books and resources and some things over there. Is there anything, any books or resources that you have that you would recommend to traders wanting to learn more about seasonals?
Jerry: Well, it kind of depends on what you’re looking for, I guess. Our primary service is the MRCI Online, of course.
Michael: … and the website’s just MRCI.com.
Jerry: Correct. It’s really a relatively inexpensive service. It starts with seasonal patterns for every individual delivery month for well over 40 markets for the major futures we follow, and stock indexes. It goes from those seasonal patterns to specific seasonal strategies. Each month it will show you 15 seasonal specific seasonal strategies of the nature.
Michael: Jerry, this has been some fascinating information and for everybody listening or reading this in our newsletter, I can’t stress the importance of knowing and studying seasonal tendencies if you’re going to trade commodities, especially if you’re going to be an option seller, these are an invaluable tool.