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Commodity Investing

Seasonality of Oil Services

Seasonality describes either price strength or weakness between specific periods for a chosen equity, sector, index or commodity. It is measured by evaluating the average return over specific periods, such as a month or quarter.

Additionally, the return relative of a specific stock or sector can be measured against a major index such as the S&P 500 or the Nasdaq Composite to determine relative seasonality.

To determine if an asset has seasonal tendencies, an analysis of certain periods can be undertaken, preferably using at least 10 years of data. Studies with less data can be used, but the results tend to be less reliable, as the sample size is too small to achieve a statistically significant analysis.

The reasons that a sector or individual stock can exhibit behaviors that are seasonal usually surround the ability to achieve stronger-than-normal returns during that period. For example, retailers tend to generate the bulk of their returns between Thanksgiving and Christmas, which could give their stock prices seasonal characteristics.

Analyzing the Results

Seasonality can be measured by evaluating the average return or the return relative to a major index. By comparing the returns of a stock or sector to a major index, an investor can determine if the stock or sector actually outperformed or underperformed the broader market during a specific period. By doing this relative analysis, an investor removes any seasonal influence a major average has on the stock or the sector.

A seasonal investment can be considered profitable if the returns are positive more than 50% and the average return is greater than zero.

The chart above shows that the oil services sector enjoys a strong seasonal tendency in January, February and April relative to the S&P 500 index. Oil services are composed of companies that supply drilling rigs to oil and gas exploration and production companies.

In each of these months the return is greater than 2.3% and the return is positive more than 64% of the time. This type of seasonal tendency means that if an investor purchased an index of oil services stocks such as the Market Vector Oil Services ETF (NYSE: OIH) at the beginning of April, it would likely outperform the S&P 500 nearly two-thirds of the time.

Factors Influencing Seasonality

Seasonality happens because of a series of annual recurring events. The S&P 500 Composite Index has a historic period of seasonal strength from the end of October to the beginning of May.

Companies within the oil services sector generally receive guidance with regard to capital expenditures for their clients, and the exploration and production companies during the first quarter. This partially contributes to the strong seasonal tendency of the returns of these companies.*

*Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official position of Wall Street analysts.


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