ETF Trades: Utilities Start Seasonal Run Early
By: Christopher Mistal
February 02, 2016
After closing out an otherwise miserable January on a positive note, the market appears to have run out of gas again here in February. Our January Indicator Trifecta combined with DJIA violating its December closing low does suggest more weakness and volatility are likely. 
To gain a better perspective, the following One-Year Seasonal pattern charts were constructed from the other seven years since 1950 that our January Indicator Trifecta was negative across the board and DJIA’s December low was breeched. Seven years is not a large data set, but it is significant enough. Average election year and 2016, through today’s close are also plotted for reference. Should the market trade in similar fashion to the previous negative Trifecta years, it could be early March before the market reaches an interim bottom and makes a tradable, multi-month trek higher.
[S&P 500 Negative Trifecta Years Seasonal Pattern]
[DJIA Negative Trifecta Years Seasonal Pattern]
New Sector Trade Idea
From the Stock Trader’s Almanac 2016, page 94, Sector Seasonality, there are two sectors that begin their seasonally favorable periods in March: High-Tech and Utilities. Some tech exposure remains in the Almanac Investor ETF Portfolio. Last year, the Utilities sector started off the year on a near chart-perfect bullish climb from the bottom left to the top right. That trend however, only lasted until the end of January.
So far this year, Utilities have been a bright spot with a solid year-to-date gain while many other sectors are currently in the red. Perhaps Utilities could be rallying because interest rates are falling and their dividends are attractive or perhaps they are advancing because global growth and deflation concerns are making the sectors’ highly regulated and stable revenues look like a safe place to park capital. Most likely, Utilities’ success thus far is a combination of these reasons and others. 
As can be seen in the following chart of the Utility Sector Index (UTY), seasonal strength typically begins following an early March bottom and usually lasts through mid-October although the bulk of the move is typically done by early May. Seasonal factors combined with the current trend suggest the Utilities still has room to run.
[Utility Sector Index (UTY) Weekly Bars and Seasonal Trend Chart]
With a little more than $7 billion in assets and average daily trading volumes in excess of 13 million shares per day over the last three months, SPDR Utilities (XLU) is the top choice to hold during Utilities seasonally favorable period. It has a gross expense ratio of just 0.14% and comes with the added kicker of a 3.48% dividend yield. XLU could be bought on dips below $45.50. This is just above its monthly pivot (blue-dashed line in chart below). Based upon its 15-year average return of 9.9% during its favorable period mid-March to the beginning of October, an auto-sell price of $55.00 is set. If purchased an initial stop loss of $40.95 is suggested.
[SPDR Utilities (XLU) Daily Bar Chart]
Portfolio Updates
January’s market rout resulted in the majority of seasonal ETF positions being stopped out. Most of the positions were closed out with low to mid-single digit losses. A few positions like SPDR Materials (XLB) and iShares NASDAQ Biotech (IBB) were closed out for slight gains. It is disappointing to realize these losses, especially during the “Best Months,” but it is always better to get out early and preserve capital for the next buying (or shorting) opportunity.
Sifting through the ashes we find five remaining positions in the ETF Portfolio; XLK, VNQ, GLD, JJC and USO. Of these only USO could be considered at current price levels with a buy limit of $9.00. The others are on hold.
The market is still on shaky ground and February’s historical track record is rather tepid, even more so following a down January. We will sit tight for now and await further evidence that the market has found support before jumping back in.
[Almanac Investor ETF Portfolio – February 1, 2016 Closes]
Disclosure Note: At press time, officers of the Hirsch Organization, or accounts they control held positions in IBB, IWM, IYT, QQQ, VNQ, XLV and XRT.