ETF Portfolio & Seasonal Switching Strategy Updates: Defensive Trades for Worst Six Months
By: Christopher Mistal
April 07, 2015
Last Thursday, I stated our case for not pulling the plug on DJIA’s and S&P 500’s “Best Six Months” early. Thus far this decision has proven timely as DJIA and S&P 500 nearly posted on gain on every day since. Today’s late day selloff ended the streak at just two days. However, broad market gains have lifted the Almanac Investor ETF Portfolio “Open Position Average % Return” from 5.3% on April 1 to 6.8% at yesterday’s close with some additional gain today.

Perhaps the biggest development since last Thursday happened on Good Friday when the market was closed. This was when March’s jobs report was released by the Bureau of Labor Statistics. It showed a net jobs increase of just 126,000 jobs in March and the unemployment rate held steady at 5.5%. The number of jobs was well below consensus and was the first reading less than 200,000 since January 2014. The report was also accompanied by downward revisions to February and January. As a result of this report and other somewhat tepid economic data lately, the hope that the Fed will wait a little longer to raise interest rates has been renewed. Based upon 30 Day Federal Funds Futures, a hike is not a real possibility until early in the fourth quarter.

[DJIA Daily Bar Chart]
[S&P 500 Daily Bar Chart]

After a stumbling start to Q2, DJIA and S&P 500 nearly posted gains on three straight days and both have climbed back above their respective 50-day moving averages (solid magenta line in each chart). Stochastic and relative strength indicators have also turned positive while the faster moving MACD indicator is confirming the shift in momentum by turning positive today (blue arrows point to crossover). This crossover is additional support for maintaining long positions that correspond with DJIA’s and S&P 500’s “Best Six Months.”

Worst Months Defensive Trade Ideas

Due to the Fed’s zero interest rate policy (ZIRP), most money market accounts (and similar places to park cash during the “Worst Six Months”) pay literally nothing. This leaves few alternatives aside from the relative safety of Treasury bonds. The problem here is longer-dated maturities offer the best yield, but also tend to be the most volatile. So any benefit of a higher yield can be quickly erased by a drop in bond price. To lessen volatility shorter duration bonds are best, but here again due to ZIRP they also offer next to no yield. 

The best approach would be to own Treasury bonds across the entire duration spectrum. By doing so, yield is likely to be more attractive and volatility could be trimmed. iShares Core Total US Bond Market (AGG) nicely does just this. It holds Treasuries of multiple durations, yields right around 2% and exhibits more price stability than other longer-dated Treasury bond ETFs. AGG has more than $24 billion in assets, trades more than 1 million shares a day on average and, best of all, its expense ratio is just 0.08%. AGG can be bought on dips below $110.12.

[iShares Core Total US Bond Market (AGG) Daily Bar Chart]

Our next ETF to consider trading during the “Worst Six Months” is iShares 20+ Year Treasury Bond (TLT). This funds name says it all. Its holdings are all long duration Treasury bonds. Its current yield is right around 2.5%, has assets in excess of $6 billion and an expense ratio of 0.15%. Average daily trading volume over the past three months is nearly 10 million shares per day. TLT’s more volatile nature can be seen in the chart below. From its high of $137.95 on the last day of January this year it quickly sank to a low of $122.97 (-10.9%) in early March before rebounding. TLT offers a modest yield advantage over AGG however; price movement is its real advantage (or disadvantage). Should the market unravel in a meaningful manner later this year, TLT could enjoy a rather robust rather. TLT’s two biggest downside risks are a solid economy and market that prompts the Fed to boost rates sooner rather than later. TLT can be considered on dips below $124.88.

[iShares 20+ Year Treasury Bond (TLT) Daily Bar Chart]

AdvisorShares Ranger Equity Bear (HDGE) is the most aggressive “Worst Six Months” defense to consider. HDGE is an actively managed ETF that establishes short positions in individual stocks. As of the end of February it had the most exposure to the Consumer Discretionary and Information Technology sectors. These two sectors combined represented 59% of the ETFs total exposure. For HDGE to be a homerun, the market needs to suffer a substantial breakdown in the “Worst Six Months.” Even if the market moves sideways, HDGE’s rather lofty 2.92% net expense ratio is going to be a drag. More than half of this fee is the cost of active management while short interest expense adds another 1.22%. Assets total nearly $125 million and average daily volume is around 100,000 shares per day. Both assets and trading activity have a tendency to swell during periods of market weakness. HDGE can be considered on dips below $10.95.

[AdvisorShares Ranger Equity Bear (HDGE) Daily Bar Chart]

ETF Portfolio Updates

With the end of the “Best Six Months” rapidly drawing near, the majority of the ETF Portfolio is on Hold. Today’s new ideas can be considered on dips. United States Natural Gas (UNG) could be bought at current levels as natural gas is seasonally strong through June. SPDR Utilities (XLU) could also be considered at current levels as its seasonally favorable period typically runs until early October.

[Almanac Investor ETF Portfolio – April 6, 2015 Closes]

Disclosure Note: At press time, officers of the Hirsch Organization, or accounts they control held positions in UNG, USO, XLU and XLV.