ETF Trades: Four New Short Ideas for May By: Christopher Mistal | May 05, 2015 | Email | Print

Last Thursday, we issued our Seasonal MACD Sell Signal for DJIA and S&P 500. NASDAQ’s Best Eight Months lasts until June. From our October 21, 2014 Seasonal MACD Buy Signal through last Thursday’s sell signal DJIA and S&P 500 both gained 7.4% in 191 calendar days. DJIA gained only 7.5% in all of 2014, this result is additional proof that the market does make the bulk of its gains in the six months from November through April. 

Full-time traders may not find this return all that impressive, but the history of steady consist returns with less volatility does add up to an impressive result in a retirement account. It also comes with the added benefit of being able to enjoy the summer without fretting over the markets every twist and turn. Updated tables comparing our Best Months Switching Strategy can be found here. NASDAQ’s return for its current “Best Eight Months” through yesterday’s close was 13.5%.

With the end of the “Best Six Months” come a slew of long sector seasonalities that also end in May: Banking, Cyclical, Healthcare, Materials, Real Estate and Transports. With the exception of Healthcare related positions, corresponding ETFs were closed out of the ETF Portfolio using closing prices from the day when we issued our Seasonal MACD Sell Signal. SPDR Retail (XRT) was also closed out. The average gain on these positions was 5.4% in the portfolio. However, if you heeded the sell advice you likely got a better price during last Friday’s market rally, possibly as much as another percent on all the positions.

Four sectors begin seasonally weak periods in May: Banking, Cyclical, Gold & Silver (stocks) and Materials. Over the past five years Cyclical and Materials have managed to eke out minor gains, on average, however, over the past 15 years, all four sectors have declined on average 6.6 to 8.0% which sets them up as good short trade candidates during the summer and early fall months.

Typically we like to take advantage of sector weakness through the use of inverse or bearish sectors. By doing so, the trade is similar to any other long trade that we choose to execute. One of the drawbacks of inverse ETFs is they frequently employ leverage and only track the daily performance of the underlying benchmark. As holding periods get longer, these types of funds often exhibit performance that differs significantly than expected due to compounding and tracking error. Three out of today’s four new trade ideas are going to be short trades. An “(S)” follows each ETF name in the Portfolio Table to denote it is a short trade. Only in the case of Gold & Silver will we use a leveraged inverse fund as its seasonally weak period is only about six weeks long.

SPDR Financial (XLF) could be shorted at $24.80 as it is currently struggling to break through projected monthly resistance (red dashed line). Look for a corresponding MACD Sell signal accompanied by a rollover of its Stochastic and relative strength indicators. Should XLF suddenly breakdown, and not reach $24.80, short it at $23.85 as it will have broken support. Set an initial stop loss at $25.50 and take profits at $20.53.

iShares DJ Transports (IYT) could be shorted on a rally toward resistance near $158.84 or on a break down below $152.02. Stochastic, MACD and relative strength are all currently weak. IYT could easily bounce or just fall apart. Watch crude oil’s price for an early indication of which way it may be. The initial stop loss is $167.80 while profits can be taken at $133.52.

Direxion Daily Jr Gold Miners Bear 3X (JDST) can be bought on dips below $7.25. JDST is volatile due to its 3x leverage and traded as low as $7.04 on April 29 to a high of $8.71 on May 1. Odds are it will flirt with or trade below our buy limit before its next move. Set a stop loss at $6.31 and considering taking profits on any pop above $8.61.

SPDR Materials (XLB) could be shorted on a rally back toward resistance near $51.50 or on a break down through support right around $49.01. After a solid rally from late March till now, it’s Stochastic, MACD and relative strength indicators are beginning to turn as a result of recent weakness. A stop loss at $52.20 is suggested and profits can be taken at $42.78.

Now that the “Best Six Months” for DJIA and S&P 500 have officially come to an end, we are shifting the portfolio toward an overall market neutral stance. Continue to Hold long positions associated with the NASDAQ’s “Best Eight Months” while considering some defensive bond and bearish ETF (HDGE) positions. We will consider a more defensive posture when NASDAQ’s favorable period ends or sooner should the market begin to unravel in earnest.