ETF Trades: Continue Holding Tech, Gold Miners on Radar
By: Christopher Mistal
June 02, 2015
Recently we have been tracking the lack of market performance this year versus past pre-election years. At the end of May DJIA was up just 1.1% year-to-date and S&P 500 2.2%. At the same point in the year in previous pre-election years DJIA was up on average slightly more than 8% while S&P 500 was typically up nearly 12%. This year’s underperformance can be explained by tepid economic data leading to so-so earnings forecasts and a Fed that is considering when to raise rates for the first time since 2006. The “glass is half full” crowd may look at this underperformance as a reason to consider buying U.S. stocks as it would seem there is a fair amount of upside potential available should the market decide to catch up to the average pre-election year. 
In order to see if there exists any historical precedent to support this notion, I queried our database going back to 1901 for DJIA and 1930 for S&P 500. I was looking for past pre-election years where DJIA and S&P 500 had year-to-date performance less than or equal to this year at the end of May. In DJIA’s case there were six years, 1903, 1907, 1923, 1931, 1939 and 1947 (the only year with a full-year gain). S&P 500 had only four since 1930, 1931, 1935 (+41.4% full-year), 1939 and 1947 (no change). In the following two charts these years are combined into a single average performance and compared to the typical pre-election year and 2015 year-to-date through May 29. Based upon these two charts, the probabilities of the market catching up are quite slim.
[DJIA Seasonal Chart]
[S&P 500 Seasonal Chart]
NASDAQ’s Best Eight Months Update
Although the “Best Six Months” for DJIA and S&P 500 have officially come to an end, NASDAQ’s “Best Eight Months” (November through June) is still in progress. As of the market’s close yesterday, both the faster and slower moving MACD indicators applied to NASDAQ were positive. However, after running into resistance (red dashed line) in late-May NASDAQ’s momentum has begun to wane. Should NASDAQ finish today around unchanged, a decline of 0.1% (about 7.5 points) would turn NASDAQ’s MACD Sell indicator negative. When NASDAQ’s MACD Sell indicator becomes negative, we will issue our NASDAQ Seasonal MACD Sell signal and begin clearing out remaining technology and small-cap positions held in the Almanac Investor ETF Portfolio.
[NASDAQ Daily Bar Chart]
June/July Sector Seasonalities
June and July tend to offer few high-probability seasonal trading opportunities in typical years. This year is shaping up to be somewhat typical. We have already seen some volatility trickle into the markets and trading volume has been light as more and more traders and investors take time off to enjoy summer. As a result, there are just three seasonal sector setups in the Stock Trader’s Almanac 2015 for June and July. The first takes advantage of seasonal weakness by natural gas stocks beginning in mid-June through the end of July. This trade is based upon the NYSE ARCA Natural Gas index (XNG). Considering the XNG has already slipped nearly 10% from its late-April highs to current level, we will pass on this opportunity as the bulk of the move is likely over.
The next two seasonalities actually begin in July. Based upon the Dow Jones Transportation index, the transports are seasonally weak from mid-July through mid-October. Last month, we shorted iShares Transports (IYT) in association with seasonal weakness in the Morgan Stanley Cyclical index. Thus far, this trade has been mildly successful. Continue to Hold the short IYT position.
July’s last seasonal opportunity is based upon the PHLX Gold/Silver index. Over the past fifteen years this index has produced an average gain of 14.6% from its end of July lows to its late December highs. The index is comprised of 30 precious metal mining company stocks. Obviously, moves higher by physical gold and silver would benefit the companies that mine the metals, but the stocks can also rise in anticipation of higher precious metals prices and during periods of uncertainty. Market Vector Gold Miners (GDX) is the ETF of choice for this trade. It has more than $6 billion in assets and has traded nearly 40 million shares on average over the past three months. Because seasonal strength does not typically begin until late-July, we will be patient and look to add GDX to the ETF Portfolio on dips below $19.25. If purchased set an initial stop loss at $17.33 and take profits at the auto-sell price of $24.27.
[Market Vector Gold Miners (GDX) Daily Bar Chart]
ETF Portfolio Updates
In preparation for the end of NASDAQ’s “Best Eight Months,” stop losses have been raised significantly for FDN, IHI, IYW, XLK, IWM and QQQ. See table below for exact values. When we issue our NASDAQ Seasonal Sell signal, we will close these positions out of the portfolio.
Previously mentioned weakness in natural gas stocks hit First Trust ISE-Revere Natural Gas (FCG) on May 26 when it closed below its stop loss of $10.79. The decline arrived early and eroded a large portion of the gains FCG had; nonetheless a 7.6% gain was realized when it was stopped out.
Defensive positions, HDGE, TLT and AGG have all been added to the portfolio and are on hold for now. When we issue NASDAQ’s Seasonal Sell signal we will reevaluate these positions and possibly increase the positions.
All four of last month’s new ETF Trade ideas were also added to the portfolio over the past month. All four positions had modest gains at yesterday’s close. Please note the changes in stop losses and auto-sell prices for these positions.
[Almanac Investor ETF Portfolio – June 1, 2015 Closes]
Disclosure Note: At press time, officers of the Hirsch Organization, or accounts they control held a position in USO.