ETF Trades: Consumer Spending Expected to Pick Up Soon
By: Christopher Mistal
August 06, 2015
Historically speaking, the consumer sector tends to begin its favorable period near the end of September and typically remains strong until the beginning of June in the following year. Back-to-school and holiday spending combined with the effects of the “Best Six Months” is the most likely driving force behind this seasonality. Like the broader market, the consumer sector has been struggling since its March/April highs. An unusually long and harsh winter deterred shoppers early in the year and summer vacations have likely tempered sales recently. Second quarter GDP was lighter than expected at 2.3%, but consumer spending was a bright spot. When winter ended shoppers did indeed return to stores; this leaves little reason to expect differently when summer vacations begin to wind down over the next 4-6 weeks.
Based upon the no-longer-calculated Morgan Stanley Consumer Index (CMR), this trade had produced an average 10.4% gain over the last 15 years. A similar seasonality and average returns exists when the S&P Retail Index (RLX) is analyzed. Last year’s two ETF trades based upon this seasonality returned an average of 11.5%. A two-pronged approach to trade this seasonality will be utilized. We already hold one consumer staples related fund in the Almanac Investor ETF Portfolio and will look to add exposure to discretionary spending on pullbacks over the next few weeks.
[S&P Retail Index (RLX) Weekly Bars and Seasonal Pattern Since July 1998 Chart]
New Trades for September Seasonalities
SPDR Retail (XRT) can also be purchased on pullbacks using a buy limit of $92.10. Set a stop loss at $82.89 and take profits at the auto sell at $111.85. Top five holdings: Netflix,, Nutrisystem, Expedia and Priceline. XRT is widely diversified and these five companies represent just 6.14% of XRT’s total holdings. As of August 5 retail apparel companies were nearly 24% of the fund and specialty stores were second largest, comprising slightly more than 16% of total fund assets. XRT has nearly $1 billion in assets, trades nearly 2 million shares a day and has a gross expense ratio of just 0.35% making it a perfect choice to trade this seasonality.  
[SPDR Retail (XRT)]
Oil’s historically weak seasonality also begins in September and is based upon the AMEX Oil index (XOI). MACD, stochastic and relative strength indicators applied to XOI are all negative and have been so since early May. But, sentiment for this sector is heavily bearish already suggesting the majority or even all of the decline may have already taken place. Aggressive traders may consider Direxion Energy Bear 3x (ERY) or ProShares UltraShort Oil & Gas (DUG) to take advantage of the sector's recent volatility however, no official trade idea is going to be presented at this time.
ETF Portfolio Updates
Holdover positions in SPDR Consumer Staples (XLP) and SPDR Healthcare (XLV) have been doing exactly what history and seasonality suggested they would do doing the “Worst Months,” they have continued their slow climb higher. XLP and XLV have both made new 52-week highs in recent trading sessions and are on Hold. 
HDGE, TLT and AGG, also part of our “Worst Months” defensive strategy, are still modestly lower since being added to the portfolio, but all have gained ground recently. When dividends are factored in, TLT and AGG become essentially unchanged. With further market weakness expected, HDGE, TLT and AGG are on Hold.
As of yesterday’s close, SPDR Materials (XLB) was the best performing ETF shorted back in May with a 10.6% gain. iShares DJ Transports (IYT) was lower, but has since bounced higher on the prospect of lower energy costs eventually leading to additional profits. Perhaps, but last time I looked shipping volumes were still falling so revenues are also likely to be still declining. Falling revenues are more likely to offset any boost that is produced by lower energy costs. SPDR Financial (XLF) looks like it could easily go either way right now. A lot of people are bullish for the sector in anticipation of all the money it might make if interest rates and the yield curve steepen, but at the same time it has been a long wait and other areas of the market are beginning to long more attractive. If the Fed does not raise rates in September, this could be the catalyst that begins to unravel the financial sector. XLB, IYT and XLF are also on Hold.
Swept up in the recent commodity rout, PowerShares DB Agriculture (DBA) and First Trust ISE-Revere Natural Gas (FCG) were both stopped out since last update on July 21. DBA was closed out for a modest 3.9% loss and FCG was closed out at a 9.8% loss. 
IBB, IYW, UNG and JO trade ideas remain unfilled. For the time being their respective buy limits remain unchanged. There is no reason to chase especially when they appear to be headed lower in the short-term. IBB, IYW, UNG, JO and GLD can be considered on dips below their respective buy limits.
Although it appears that we have overstayed the late-July S&P 500 short-trade by still holding ProShares UltraShort S&P 500 (SDS), the market is having a tough time during the first nine trading days of August. Continue to Hold SDS. We will look to exit this position sometime in the next five trading days.
See table below for updated stop losses.
[Almanac Investor ETF Portfolio – August 5, 2015 Closes]
Disclosure Note: At press time, officers of the Hirsch Organization, or accounts they control did not hold any position in the ETF’s mentioned above.