ETF Trades: Riding the Yearend Rally
By: Christopher Mistal
December 04, 2014
Over the course of this year, we have compared 2014 to past midterm years and more specifically midterm years that were also sixth years of presidential terms. Prior to this year there were seven previous presidents that served a sixth year in office since 1901; Presidents Wilson (1918), Roosevelt (1938), Eisenhower (1958), Nixon (1974, resigned after completing more than half the year in office), Reagan (1986), Clinton (1998) and G.W.Bush (2006). President McKinley was elected to a second term, but was assassinated in his fifth year in office. Once again the one-year seasonal pattern for Sixth Years is compared to all midterm years and 2014 year-to-date in the following charts.

[DJIA Sixth Years, Midterm years & 2014 Seasonal pattern chart]
[S&P 500 Sixth Years, Midterm years & 2014 Seasonal pattern chart]

Whether you are a believer or not in seasonal patterns and analysis, it is difficult to ignore the fact that DJIA and S&P 500 have tracked the Sixth Years seasonal pattern rather well in 2014. January proved to be a tough month, but from the beginning of February into the third quarter, DJIA and S&P 500 both moved steadily higher just as they had both done in previous Sixth Years. However, rather than peaking early in the third quarter, they continued higher until mid-September before crumbling into mid-October. And from their October lows, DJIA and S&P 500 rocketed higher, just as the Sixth Year pattern does.

Now the Sixth Year pattern is suggesting a brief period of consolidation before the market resumes its march higher into yearend. This pause is likely to last until mid-December and DJIA and S&P 500 could finish the month around 2% higher than they are currently trading.

Portfolio Updates

Typically, the upcoming month’s trade ideas would be presented at this time. However, just one short sector seasonality begins in January, Computer Tech. Based upon the most recent 5-year track record of this trade, found on page 94 of Stock Trader’s Almanac 2015, posting an average loss of 0.9%, we will pass on this trade for now. The longer-term, 15-year track record is still respectable and worth a second look in early January. Should a solid short-trade setup present itself then, a new trade idea will be considered.

As a reminder, three sector seasonalities come to an end in December: Gold & Silver, Semiconductor, and Telecom. Gold & Silver related positions were stopped out or cancelled in early September. iShares DJ US Telecom (IYZ) and iShares PHLX Semiconductor (SOXX) are on Hold. IYZ has been struggling and its technical picture is also weak. Rather than outright selling IYZ, employ a very tight stop loss at $29.67. SOXX is an entirely different situation having surged higher with the broad market. As of the close on December 3, SOXX was up 16.3% since being added to the portfolio on October 21. Beginning with today’s SOXX closing price a 5% trailing stop loss, based on closing price, is suggested. Stop only if SOXX closes below this trailing stop.

SPDR Gold (GLD) was added on November 12 to take advantage of gold’s seasonal tendency to rally from mid-November to early December as featured in Commodity Trader’s Almanac 2013. This trade has been moderately successful this year with GLD gaining 3.9% through yesterday’s close. But, this brief seasonality is coming to an end and GLD is already starting to show signs of fatigue. Sell GLD. For tracking purposes, GLD will be closed out of the portfolio using today’s closing price.

Per last month’s advice, CurrencyShares British Pound (FXB) and CurrencyShares Euro (FXE) have been closed out of the portfolio. Relatively solid U.S growth, when compared to Europe, has kept a bid under the U.S. dollar. As a result, typical seasonal strength in the British pound and the euro never materialized. Modest losses of 1.8% for FXB and 1.7% for FXE were realized. 

Overall, the market’s performance since last update has translated into respectable gains for most positions held in the ETF portfolio. Healthcare, biotech, semiconductor and transport related trades are performing best showing double-gains as of yesterday’s close. “Best Six/Eight Month” trade ideas, DIA, IWM, QQQ and SPY, are also performing well, up an average 7.0%. With major indices trading at or near all-time highs, the majority of the portfolio is on Hold.   

[Almanac Investor ETF Portfolio – December 3, 2014 Closes]

Disclosure Note: At press time, officers of the Hirsch Organization, or accounts they control held positions in IBB, IWM, IYT, QQQ, SPY, UNG, VNQ, XLF, XLI and XLV.