Does the FOMC "Drift" Effect Work in the Oil and Gas Segment?

The effectiveness of the FOMC drift effect in the US stock market forecasting has been previously identified. The study has shown that US stock market indices and stocks grow 24 hours before FOMC meetings. Moreover, profits increase when opening long positions 36 hours before FOMC meetings.

Today we will consider the reactions of oil and gas to the upcoming FOMC meetings.

Strategy

Opening a long position on instruments:

• at the opening of an hour, 8 hours before FOMC meetings;
• at the opening of an hour, 12 hours before FOMC meetings;
• at the opening of an hour, 24 hours before FOMC meetings;
• at the opening of an hour, 36 hours before FOMC meetings;
• at the opening of an hour, 48 hours before FOMC meetings.

Closing a position at the end of the hour just before FOMC meetings.

The strategy will be evaluated according to the following criteria:

• The average rate of return reflects the relative change in the quotes of financial instruments in percentage. A positive value of the rate of return indicates the profitability of the strategy, a negative one indicates a loss. 

The average rate of return (R) of a financial instrument is calculated using the formula:

where:

n is the number of trades;

P (%) – the percentage of change in the quote of a financial instrument at the time of fixing a position, is calculated as follows:

for buy positions

P (%) = (position closing price - position opening price) / position opening price * 100%

for sell positions

P (%) = (position opening price - position closing price) / position opening price * 100%

• The total rate of return (TR) is the sum of the profits from all trades. The greater the value of the total rate of return, the greater the profit brought by the signal during its testing period. 

• Maximum drawdown (MaxDD) is the maximum loss in percentage terms from fixing unprofitable trades for the entire testing period. The lower the value of the maximum drawdown, the better the trading signal works.

where:

n – number of trades;

TRn – total rate of return of n trades;

DDn – drawdown at the time of closing the n-th trade;

MaxDD – maximum drawdown.

Analysis of the obtained results

So, as expected, oil and gas grow 24 hours before FOMC meetings. The average rate of return in the segment of oil and gas is 0.54% with a maximum drawdown not exceeding 20%.

The strategy rate of return with entering the market 36 hours before FOMC meetings is slightly inferior and amounts to 0.46%. And the maximum drawdown of such an entry into the market increases by 2 times on average.

Let's see how the average rate of return of the strategy changes when closing positions after FOMC meetings:

As can be seen, the FOMC “drift” effect in the segment of oil and gas is active not only before the meetings, but also within 12 hours after the meetings, and also slightly intensifies 8 hours after the meetings.

Let's compare market exit strategies just before FOMC meetings and 8 hours after the meetings:

With minor differences in the average rate of return of the segment, let's pay attention to the maximum drawdown of instruments. And note that the minimum losses according to the results of testing fall on entering the market 24 hours before FOMC meetings and exiting the market immediately before the meetings.

With the specified parameters of the strategy, the average rate of return is about 0.6%. It has been shown by WTI oil and natural gas. Brent oil has shown the average rate of return of 0.45%. WTI oil reacts better to the considered effect.

Detailed results are shown in the Appendix:

XLSX (0.05 MB)Does the FOMC drift effect work in the oil and gas segment.xlsx

See also:

Stock Market Anomalies: The FOMC 'Drift' Effect MarketCheese

"Drift" of Metals Before FOMC Meetings

How Does the US Dollar React To the Upcoming FOMC Meetings?