The Bottom Line: ETF’s with Favorable Seasonality

Posted by Don Vialoux - Timing the Market

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The Bottom Line
The current short term correction in equity indices and sectors is setting up a buy opportunity. Technical signs of a bottom to the current correction have yet to appear. Please be patient. The charts will let us know when new money can enter the market. The focus is on economically sensitive equities and ETFs that have favourable seasonal characteristics. Prospects for gains beyond the correction are significant.

….read 48 Charts & analysis HERE

Gasoline Prices: Heading Higher!

U.S. and Canadian unleaded gasoline prices are about to enter into a period of seasonal strength. Will they move higher again this year?

U.S. wholesale unleaded gasoline prices have a period of seasonal strength from the end of January to the end of April. The trade has been profitable in nine of the past 10 periods for an average gain per period of 22.6%. Assuming that the $0.68 per gallon retail mark up on the wholesale price of gasoline remains the same and assuming the 22.6% gain per period occurs again, the average retail price of regular unleaded gasoline in the U.S. will rise from $3.11 to $3.66 U.S. per gallon by the end of April. Because Canadian regular unleaded gasoline prices are closely tied to U.S. prices, the Canadian price, assuming no change in the Canadian Dollar, is slated to increase from $1.13 Cdn. to $1.33 Cdn. per litre.

A major reason for seasonal strength is a decline in inventories in the U.S. starting in February and climaxing in May when the summer driving season begins. Inventories usually decline during this period because refiners are slowing refined product output when converting production from heating oil for the winter heating season to unleaded gasoline for the summer driving season. Refiners also complete their annual maintenance programs during this period. Breakdowns in refineries frequently occur during this period including fires and explosions.

Last week, the U.S. Environmental Protection Agency (EPA) announced changes that are expected to boost the retail price of unleaded gasoline significantly by spring. Last October, the EPA confirmed the safe use of a blend consisting of 15 percent ethanol and 85 percent gasoline for all light-duty motor vehicles manufactured since 2007. The recommended use for vehicles manufactured from 2001 to 2006 was a blend consisting of 10 percent ethanol and 90 percent gasoline. Last week the EPA expanded the October decision confirming the safe use of the blend better known as E15 for vehicles manufactured from 2001 to 2006.

The decision poses a challenge and an additional cost for U.S. gasoline producers. Additional E15 production requires a change in configuration for refiners, expands the need for larger storage facilities, raises marketing costs and requires additional distribution facilities. Blended gasoline cannot be transported through pipelines due to its corrosive characteristics and must be stored and transported separately from unblended gasoline. At best, maintaining gasoline inventories at historic levels will be a significant challenge this spring.

The winners of the EPA’s decision are America’s corn farmers and the ethanol industry. Corn is the main feedstock for production of ethanol. Corn slated for ethanol production is expected to rise to 4.9 billion bushels in 2011, or approximately 36 percent of total U.S. corn production, versus 600,000 bushels, or 6 percent of total production, in 2001. Corn prices already have escalated prior to the EPA’s announcement. The EPA’s decision places additional upside pressure on corn and ethanol prices.

Opposition to the EPA’s decision comes from the auto industry, cattle ranchers, food companies, owners of cars manufactured prior to 2007, and, ironically, environmental groups.

On the charts the wholesale price of gasoline has an attractive intermediate technical profile. It is in an intermediate uptrend and trades above its 50 and 200 day moving averages. Short term momentum indicators are overbought.

Now is a good time for Canadian “snow birds” to drive to the southern U.S. for their winter holiday before gasoline prices begin to ramp up.

One way to invest in gasoline is to own an Exchange Traded Fund that tracks U.S. gasoline prices. The United States Gasoline Fund, trading under symbol UGA on the New York Stock Exchange, reflects the changes in percentage terms of the spot price of gasoline.

Another way to invest in the phenomenon is to own Canadian and U.S. energy equities and related Exchange Traded Funds. Energy equities are more sensitive to changes in gasoline prices than to changes in crude oil prices. Seasonal influences for the sector turn positive in the second half of February. Traders are watching gasoline inventory levels closely for a reason to invest in the energy sector. February historically has been an opportune time to look for a technical entry point for the seasonal trade.

Jon and Don Vialoux are authors of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. Reports are available at and . Follow us on Twitter@EquityClock.