ETF Trades: Nearly the Season to Consider Energy Stocks By: Christopher Mistal | December 01, 2015 | Email | Print

At the current pace, 2015 is on track to be a flat year. At yesterday’s close, the last day of November, DJIA was down 0.6% year-to-date while S&P 500 was up just 1.0%. We have heard much about December’s prowess for gains recently. Going back to 1901, DJIA in December has been up 71.9% of the time with an average gain of 1.5%. Since 1930, S&P 500 has been up 72.9% of the time with an average gain of 1.4%. For DJIA, December is the best month by average performance and frequency of gains. S&P 500 is second best by average performance, but still first in frequency of gains. Expectations for December are clearly running high this year.

 

However, in the following table we see that the market’s flat year-to-date performance could weigh on December’s performance this year. All past DJIA and S&P 500 years where year-to-date performance on the last day of November was less than or equal to 2015 appear. The frequency of December gains dips modestly to 64.4% for DJIA and 63.6% for S&P 500. Average performance falls noticeably. Ultimately, the fate of December this year is most likely in the hands of the Fed. Should they raise rates this month; the removal of uncertainty will likely send stocks higher into yearend.

 

 

 

In the chart below, the NYSE Arca Oil Index (XOI) of oil producing companies has reasonably closely tracked its seasonal pattern this year peaking in May then falling to an early-October low where it bounced. Since bouncing off multi-year lows in August and again in October, XOI has essentially moved sideways for the past seven weeks. Should XOI fall back in line with its seasonal pattern, another buying opportunity is likely sometime later this year or earlier next year.

 

 

Oil companies typically come into favor in mid-December and remain so until the beginning of July (yellow box in chart above). This trade has averaged 11.9%, 11.6%, and 7.5% gains over the last 15-, 10-, and 5-year periods, This seasonality is not based upon the commodity itself; rather it is based upon XOI. This price-weighted index is composed of thirteen of the largest integrated oil and gas producers. We will look to add the following ETF to the portfolio on a dip.

 

 

SPDR Energy (XLE) is the top pick to trade this seasonality. A new position in XLE could be established on pullbacks with a buy limit of $66.10. Employ a stop loss of $59.49. Take profits at the auto sell of $81.36. Exxon Mobil is the top holding in XLE at 17.15%. The remaining top five holdings of XLE are Chevron, Schlumberger, EOG Resources and Occidental Petroleum.

 

 

As a reminder, three sector seasonalities come to an end in December: Gold & Silver, Semiconductor, and Telecom. The existing SPDR Gold (GLD) position is not related directly to this seasonality, but does benefit from it. Gold is currently sitting at key support and can do one of three things; do nothing, break down or stage an oversold rally. Our position in GLD was acquired near the lows and can be held as an oversold bounce appears to be the highest probability outcome. iShares DJ US Telecom (IYZ) and iShares PHLX Semiconductor (SOXX) are on Hold. IYZ was up 8.9% as of yesterday’s close while SOXX was recently added on November 13 at $87.15, up 5.1% already.

 

In addition to SOXX, iShares DJ Transports (IYT) and Vanguard REIT (VNQ) were added to the portfolio on November 13 leaving only SPDR Technology (XLK) as the last open trade idea. IYT and XLK can be considered on dips below their respective buy limits.

 

The second trade idea from last month’s Sector Seasonal Trades, iShares Barclays 20+ Tear Bond (TLT) was shorted today when it traded above $122.59. Because we use the previous days close to calculate returns there is no return yet listed in the table. However, as of today’s close this trade is slightly in the red and the position is on hold.

 

Based upon historical analysis, this December is expected to open bullishly, which it did today by bucking the first trading days recent streak of weakness, then the market is likely to drift sideways to lower into mid-month before rallying to close out the year. The magnitude of the rally will likely largely depend on the Fed. Based upon this expectation, DIA, IWM, QQQ and SPY could be purchased on dips below their buy limits.

 

See table below for updated buy limits, stop losses and auto-sell prices.