ETF Trades: Defense Begins Paying Off & Two New Longs to Consider
By: Christopher Mistal
July 07, 2015
Today’s late-trading-session rally may have had a profound impact on the outcome of all of July’s performance, based upon historical data since 1950. Had the S&P 500 finished the day where it was mid-morning, the first four trading days of July would have been negative. When the first four trading days were negative before, full-month July was also down 69.6% of the time with an average loss of 1%. However, when S&P 500 finished the first four days positive, full-month July was also positive 66.7% of the time with an average gain of 2.0%. A single day’s trading has raised the odds of a full-month advance from just 30.4% to 66.7%. 
[S&P 500 First Four Days Table]
New Trade Ideas for August Seasonalities
Biotechnology sector enters its historical favorable season in August. iShares NASDAQ Biotech (IBB) could be bought on dips below $350.00. The stop loss is $315.00 and auto sell is $492.80. A 28.0% average gain has occurred over the last 15 years while an average gain of 29.1% has taken place the most recent 5 years. There is no doubt that biotech has been hot in recent years and even though valuations are not all that attractive, this is where growth can be found. It is also quite likely that this sector will play a significant part in the next secular bull market. After peaking in late June, IBB has come under some pressure along with the broader market. Stochastic, relative strength and MACD indicators are confirming the loss of momentum but have yet to reach oversold territory. Look for an improving technical picture after any dip below its 50-day moving average as an opportunity to establish new long positions.
[iShares NASDAQ Biotech (IBB) Daily Bar Chart]
Over the last 15 years, High-Tech has generated an average return of 15.1%, and for the last five years the average has improved to 19.3% during its bullish season from mid-August to mid-January. Our top ETF within this sector is iShares DJ US Tech (IYW). A buy limit of $100.25 and stop loss of $90.23 are appropriate. If high-tech produces above average gains, profits will be taken at the auto sell of $126.93. After spending nearly three months (March to May) in a holding pattern, IYW briefly broke out in late May, but quickly failed at resistance (red dashed line) and has struggled since. Look to enter a new IYW position on any pullback back to its January/February lows which are just below its current 50-day moving average.
[iShares DJ US Tech (IYW) Daily Bar Chart]
ETF Portfolio Updates
Since doubling down on defensive positions in HDGE, TLT and AGG when we issued our official Seasonal MACD Sell for NASDAQ, the market has taken a turn for the worse. This has aided these defensive positions. As of yesterday’s close, HDGE was up 2.7% while TLT and AGG were closing in on breakeven. Today’s wild market ride has left bonds modestly higher and HDGE slightly lower.
Ahead of crude oil’s recent rout, SPDR Energy (XLE) was stopped out on June 29, when it closed below $74.65. Since energy stocks typically fall out of favor around the beginning of July, no new trade will be considered now. Crude’s decline has also erased nearly all of the United States Oil Fund (USO) had racked up. Over-supply fears, a strengthening U.S. dollar and general global growth concerns have all weighed heavily on price. Today’s wild ride by USO suggests the selloff may be coming to an end. Tomorrow’s weekly petroleum status report will be the next catalyst to move oil. Focus on the demand numbers more so than the supply numbers. We all know there is plenty of oil available today, but what about tomorrow when U.S. demand is solidly rising again?  
The strengthening dollar has also plagued another position in the ETF Portfolio, Market Vectors Gold Miners (GDX). This trade was likely executed too early as seasonal strength in gold & silver stocks does not typically begin until the end of July. Nonetheless, GDX closed below its stop loss today and will be closed out of the portfolio in the next update.
Short positions in XLF, IYT and XLB have done well recently and remain on Hold. Associated stop losses have been updated in the table below.
With the exception of today’s new trade ideas the rest of the portfolio is on Hold. See table below for updated stop losses.
[Almanac Investor ETF Portfolio – July 6, 2015 Closes]
Disclosure Note: At press time, officers of the Hirsch Organization, or accounts they control held a position in USO.