Module 6 – Holiday special, crude oil – stocks correlation
Arthur Merrill already wrote about this in 1968, when he released the book “Behavior of prices on Wall Street, quote: “There are few market patterns that occur with such unbelievable regularity that you must become aware of them.”
In his book he also said, quote: “The day preceding a holiday is usually a good day. The market has risen two thirds of the time. In the case of a long holiday, the market has risen 71.8% of the time. These ratios are highly significant.”
So, holidays are great, especially if you are trading stocks. They offer accurate and impulsive trading opportunities for the short-term stock trader. And this has been around for centuries. In this lesson we will examine a lot of different holidays, and what usually happens in the stock market around those times.
In this module you will also learn how crude oil relates to and affects stocks and gold prices.
2020 has been an amazing year with so many learnings. The important thing is we continue to look forward and learn from the things that the market is teaching us over time.
So, there is an awesome case study on predicting stock prices and the crude oil crash of 2020.
First, we do not know much more than you do when it comes to the why. Why did oil prices crash in early 2020 into the negative territory? Well, yes of course Saudi was a big player in it and the U.S. produced a lot of crude oil. And since crude oil is a physical supply and demand market, and the supply got massive and so on and forth. Everything that we can also read in news and the media outlets.
But that really does not matter. And while it is quite interesting, we are more concerned about the correlation between crude oil and stocks.
In other words, we want to use the knowledge of what crude oil does and project that onto stocks, and therefore, predict future price movement of stocks. And this even relates to gold, as you will learn in this module.
This is a sentence that most accurately explains the relationship of crude oil and stocks. “High crude oil prices adversely affect economic growth and hence push share prices down”.
This is an economic thought that we found there is a lot of truth to it. This also makes a lot of sense from a commonsense perspective. High prices of crude oil, which is the thing that makes the world go around, must be tough on the economy. So, in turn, lower prices of crude oil must be good for the economy.
Lesson 1: The Holiday Trading Strategy
The most important holidays we like to trade during are the 4th of July, Thanksgiving, and Christmas. But also, we will also show you an interesting cycle when it comes to the FED or FOMC Meetings Calendar.
During holidays, stock prices are not random, a lot of times during the year stock prices will be random. But during these specific time periods we are going to show you in this lesson, stock prices are not random at all. Holidays are emotional time periods and there are a lot of ways we can use holiday time periods for short term trading opportunities.
And for everyone that has been reading so far, here is a little free nugget for you.
One of the holidays that should be part of your holiday trading calendar is Thanksgiving.
This is a trade we can take advantage on in a lot of ways.
First let us look at the overall performance on the S&P500. You will learn that the 25-year seasonality on S&P500 shows a clear seasonal low in and around the end of October. A First shorter term peak after the first trading week of November, after which the market usually goes slightly down or sideways, preparing for the Thanksgiving rally. Thanksgiving is usually on any day from the 22nd to the 28th of November. The strategy here is to buy the S&P500 roughly 5 trading days prior to the holiday.
But let us further spin the wheel and think about this for a moment. Well, what happens the day of and the day after Thanksgiving? Black Friday, right? So, what do people tend to do? They run out and buy all the junk from China. So, also the Shanghai Index tends to rally during this American holiday. And when we buy all that stuff from China, where do we go and buy that from? Walmart right. Walmart also tends to rally during this time of the year. Clearly, again during this time of the year we have a big advantage in the game, as a lot of consumer stocks tend to rally. Not just Walmart, also Starbucks for example, because then people will go out and buy a coffee for their shopping trips. Just go back to your charts and look at Walmart and Starbucks the beginning and mid of November. These are usually exceptionally good buying points.
In summary, holidays and FOMC meetings tend to be very bullish short-term periods of the year, we can take advantage of in many ways, if our set of rules align accordingly.
Lesson 2: Crude Oil and Gold
Before we go into the relationship between crude oil and stocks, let us quickly talk about crude oil and gold. There is a highly informative paper, published by Thai-Ha Le Chang. It is called “Oil and Gold prices: Correlation or causation?”
In this paper, Thai raises a lot of interesting points, like the following. Quote: “Crude oil price spikes aggravate the inflation, whereas gold is renowned as an effective tool to hedge against inflation. Hence, inflation, which is strengthened by high oil price, causes an increase in demand for gold and thus leads to a rise in gold price.”
In other words, the basic economic thought here is that higher energy prices are supportive of inflation, which strengthens the demand for gold, and therefore, if oil prices rise, also gold rises. One of the main findings in Thai’s study is that I quote: “Oil price does nonlinearly cause the gold price and can be used to predict the gold price.”
In other words, can we look at the price charts of crude oil, and through that predict what is going to happen in the gold market?
What you will learn here is amazing. Crude oil, with extremely high accuracy predicted the turning points of gold with some particular lead times, which you will learn in this lesson. We can use this information to get a general understanding of what to expect in the future if you are a gold trader.
Now, we understand the relationship of crude oil to gold, and how crude oil prices today can predict what is going to happen in the gold market in the future.
The big question now is if there is also a crude oil lead time to stocks?
Lesson 3: Crude Oil and Stocks
Yes, there is, crude oil and stocks oftentimes move hand in glove. There is almost no lead time between crude oil and stocks. They just move directionally remarkably similar, though of course at a different rate of speed. They both go down and they both come back up. This we already knew right. We understand that stocks and crude oil can be positively correlated at times.
The problem here is that this is nothing that is going to help us with predicting major turning points in stocks like we can with lead times in gold.
However, crude oil can also lead the stock market. The exact lead times that we use you will learn in this lesson. And this ladies and gentlemen is where it gets extremely interesting.
We can look at crude oil to get a glimpse of the future of what is in store for stocks. But why is that really? It all boils down to the basic economic thought. By the time we get lower prices into the economy it has a spin off effect in the economy and at some point, in the companies we trade.
Sat, Jun 18, 2022 9:30 AM – 12:30 PM