ETF Trades: Buying Weakness Ahead of “Best Six/Eight Months” By: Christopher Mistal | September 22, 2015 | Email | Print

For 48 years the new edition of the Stock Trader’s Almanac has been released early in the fourth quarter. And for the past fourteen years we have been preparing Almanac Investor readers for the annual October ETF buying spree. This year is no exception, but before delving into October’s seasonalities, let’s do a quick review for new and seasoned followers alike.

 

Every year while preparing the annual Almanac, we revisit and analyze our sector seasonalities (STA 2016 pages 94, 96 and 98) in great depth in order to make adjustments for any new or developing trends. There have been a few minor revisions made to our Sector Seasonalities table over the past few years, but for the most part, sector seasonality has been reasonably on track since September 2009 with many sectors producing the bulk of their annual gains during their traditionally favorable periods. Years of sector research allows us to specify whether the seasonality starts or finishes in the beginning third (B), middle third (M) or last third (E) of the month based upon the number of trading days in the month. 

 

The 2016 Almanac table follows. Keen observers and long-time readers will note the absence of several indices. Those indices that no longer appear are no longer being calculated or are not readily available in the public domain. In the place of discontinued indices we have added S&P Sector indices. Both long and short trade opportunities are researched with the best possible (and most statically viable) indices appearing below. 

 

 

These entry and exit points will be the basis for our seasonal trades over the coming year. They are guidelines, as we generally look to enter new positions before the start of the favorable period and exit before its end. Occasionally a trade is closed out well in advance of the seasonality’s end. An outsized advance may trigger a trade at the suggested auto-sell price (a price target based upon past historical performance of the specific seasonality) or should strength fail to materialize, a stop loss could be reached.

 

There are twelve sector seasonalities that enter their favorable periods in October. The following trade ideas are made based upon these seasonalities. Currently, all buy limits are below current market levels. Should the market retest its August lows prior to our Seasonal MACD Buy Signal triggering sometime on or after October 1, we want to take advantage of the pullback to begin accumulating the following new positions.

 

 

Transports enter their historically favorable season at the beginning of October and it runs until May. iShares DJ Transports (IYT) is attractive below current levels with a buy limit of $134.08. The stop loss is $120.67 and auto sell is $175.95. Top 5 holdings are: FedEx, United Parcel Service, Kansas City Southern, Union Pacific and Ryder System. With nearly 70% of U.S GDP coming from consumers, seasonal strength in the consumer sector overlaps nicely with the transportation sector. All those holiday gifts need to be moved from the factories to the stores. Lower energy prices can also give this trade a boost. If IYT trades below its buy limit, we will cover the IYT short trade and simultaneously establish a new long position.   

 

 

Over the last 15 years, Telecom has generated an average return of 7.2%, but for the last 5 years the average has slipped to 4.4% during its bullish seasonality from the middle of October through yearend. The top ETF within this sector is iShares DJ US Telecom (IYZ). Use a buy limit of $27.25 and stop loss of $24.53. If above average gains materialize, take profits at the auto sell of $32.13. Top 5 holdings are: AT&T, Verizon, T-Mobile, Level Communications and SBA Communications. Aggressive competition has not been kind to growth, but IYZ does boast a 2.68% yield and new product offerings should bring consumers in for an upgrade.

 

 

Semiconductors come into favor near October’s end and remain so until the beginning of December. This trade has averaged 12.7% and 10.2% gains over the last 15- and 5-year periods, respectively. iShares PHLX Semiconductor (SOXX) is the top selection. Establish new positions with a buy limit of $76.01 and utilize a stop loss of $68.41. Take profits at the auto sell of $94.23. Top 5 holdings are: Intel, Avago Technologies, Texas Instruments, QUALCOMM and Taiwan Semiconductor. We consumers have a near insatiable appetite for nearly all things tech, these are the companies that design and supply the brains for most of our favorite devices.

 

 

The line between Broker/Dealer and Banking sectors has become increasingly fuzzy in recent years with both sectors averaging gains of 24.7% and 18.9% over the last 5 years. Instead of trading two smaller, somewhat less liquid ETFs as has been done in the past, SPDR Financial (XLF) is the better choice. Use a buy limit of $21.05 and a stop loss of $18.95 once a position has been entered. The auto sell is $26.81. Its holdings cover all things financial from insurance companies to stock exchanges. Top 5 holdings are: Berkshire Hathaway, Wells Fargo, JPMorgan Chase, Bank of America and Citigroup. The Fed has delayed raising rates again, but at some point they will go higher. A steepening yield curve combined with a respectably healthy labor market should give this group a boost.

 

 

Yet another area exhibiting a reasonable amount of overlap is the Healthcare and Pharmaceutical sectors, at least as far as many ETFs are concerned. Healthcare has racked up a rather impressive 18.9% average return over the past five years while Pharmaceutical alone has been just 7.1%. SPDR Health Care (XLV) does an excellent job of representing both sectors and comes with the added bonus of holding several well-established biotechnology companies as well. XLV is attractive near current levels with a buy limit of $67.86. The stop loss is $61.07 and auto sell is $88.31. Top five holdings are: Johnson & Johnson, Pfizer, Gilead Sciences, Merck and UnitedHealth Group. Whether we like it or not, Obamacare is likely here to stay. It mandated coverage or a fine and did little to control prices.  Despite certain Democratic-presidential-nominee-seeking comments, double-digit price increases will continue and this group stands to benefit (financially) the most. 

 

 

Materials have a favorable period that runs from the beginning of October through the beginning of May with historical returns of 18.1% over both the last 15- and 5- year periods. Buy SPDR Materials (XLB) with a buy limit of $39.50. Once purchased, set a stop loss of $35.55 and an auto sell of $51.31. Top 5 holdings are: Dow Chemical, Du Pont, Monsanto, LyondellBasell Industries and Praxair. Outside of the energy sector, this group has been another big loser in 2015. Tepid global growth, actual and forecast, has depressed this bunch. Valuations are attractive and forecasts can change quickly which could lead to a rush to reenter this sector at any sign of improvement.

 

 

Computer Tech comes into favor in early October and remains so until the beginning of January. This trade has averaged 12.2% and 9.3% gains over the last 15- and 5-year periods, respectively. SPDR Technology (XLK) is the top selection. Enter this trade with a buy limit of $37.70 and employ a stop loss of $33.93. Take profits at the auto sell of $46.53. Top 5 holdings are: Apple, Microsoft, Facebook, AT&T and Google (combining Class A & C shares would make GOOG the second largest holding). Apple is the largest current holding, at 16.55% of total assets. Smartphones and tablets are continually replacing desktops and laptops. Many of XLK’s holdings are well positioned to profit from this trend either directly or indirectly.

 

 

Real Estate has seen returns of 13.2% and 13.0% over the last 15 and 5 years respectively from the end of October to the beginning of May. Vanguard REIT (VNQ) is our choice. Use a buy limit of $72.46 and a stop loss of $65.21 once a position has been entered. The auto sell is $90.23. Top 5 holdings are: Simon Property, Public Storage, Equity Residential, Health Care REIT Inc. and AvalonBay Communities. Although sensitive to interest rates, this trade provides exposure to rental markets, commercial and residential, which have been performing well recently.

 

 

 

Defensive positions in TLT, IEF and AGG are on hold. We will continue to hold these positions until the “Best Six/Eight Months” officially begin sometime on or after October 1 when we issue our MACD Seasonal Buy signal Alert.

 

iPath DJ-UBS Coffee Sub-Idx TR ETN (COW) was stopped out on September 10 when it closed below $19.10. A 7.3% loss was recorded on this trade as typical seasonal strength in coffee was suppressed by ample supplies and a strong dollar.

 

SPDR Gold (GLD) should be closed out. Sell GLD. Shares did bounce modestly higher in August, but strength has been fading. For tracking purposes, GLD will be closed out of the portfolio using its average trading price (open plus close divided by two) tomorrow, September 23.

 

iShares NASDAQ Biotech (IBB), iShares US Tech (IYW) and SPDR Retail (XRT) can be considered on dips below their respective buy limits. Buy limit, Stop loss, auto-sell and presented price for XRT have been adjusted to account for its 2 for 1 split on September 11.