ETF Trades: Best Months Not Over Yet By: Christopher Mistal | February 18, 2016 | Email | Print

Earlier today in our webinar, “Stock Trader’s Almanac 2016 Update: Plotting a course of action in uncertain times,” [Editor’s note: A link to the video archive will be sent to everyone that registered for the webinar tomorrow, regardless if you attended or not.] Jeff recapped the markets action thus far in 2016 and offered a near-term outlook as well as a longer-term forecast that keeps the market on track to its next major Super Boom. In the short-term, a rally to close out the “Best Six Months” is likely underway. But new all-times highs are not expected. Once the “Best Months” conclude more weakness is expected over the summer ahead of Election Day in November. From there another mild rally to finish up the year, again new highs are still not expected.

 

Last year in mid-December, we presented two possible scenarios for 2016: “If the Fed is right and the energy and commodities price decline proves transitory and prices stabilize, we expect average election year gains in the mid-single digits. If the Fed is wrong and oil and commodities suffer further declines and the junk bond scenario unravels we may begin a mild bear market next year.” The second scenario here appears to have mostly played out already. Oil did indeed continue to slide to start the year, further exasperating all the concerns associated with lower prices. Namely, yields on debt tied to the energy sector and not just the companies that issued it but also the banks that financed it.

 

Now it appears the first scenario may be setting up to play out. For starters, the Fed has acknowledged the market’s fears and is likely to slow the pace of rate hikes. Second, oil looks like it is trying to stabilize as OPEC, led by Saudi Arabia, and Russia have come to agreement to cap production. Qatar and Venezuela are also on board while Iran was open to the plan, but not formally committed to it. Oil’s historic crash from over $100 per barrel in 2014 to under $30 this year can be seen in the next chart. Other than a brief period early last year, oil’s trajectory had been consistently lower. Over the past few weeks, the plunge has abated. This represents the first step towards possibly firmer prices.

 

 

Another source of market angst, the stronger U.S. dollar also appears to be finding a trading range. Provided it remains in the range or breaks lower, then the higher dollar headwind to corporate revenues and U.S. exports should dissipate. After failing to hold its breakout above 100 on more than one occasion, the U.S. Dollar Index has been bouncing around in a range from around 94 to 100. Year-over-year corporate comparisons should begin to ease in Q2 and beyond as the rocket ride higher for the Dollar appears over.

 

 

This Tuesday’s Alert, looked at the markets recent technical improvement. Stochastic, relative strength and MACD indicators had all turned the corner confirming the shift in momentum. And as expected DJIA and S&P 500 did run into resistance around 16440 and 1930 respectively yesterday and are taking a breather today. Considering the size and pace of the recent move off the lows of last Thursday, it is not surprising to see a pause. Provided the market can hold the bulk of the move over the past three trading sessions, it will likely punch through resistance and continue higher at least until it runs into the next level of resistance roughly around the 50-day moving average.

 

During the market’s recent 3-day rally, typical safe havens like Treasury bonds fell briskly. In the following chart of iShares 20+ Year Treasury Bond (TLT), you can see its explosive move from around $120 at the end of December to around $135 last week, roughly matching its peak from the end of January 2015. The spike looks like it was largely panic driven and could easily be the high for 2016.  

 

To be clear, we remain cautious and concerned however, we do see an opportunity on the long side developing. Headwinds to the market and the global economy still abound and are likely to take a lengthy period of time to completely fade. Concerns of a repeat of 2008 or even 2000 are also likely overblown. A lack of regulation and proper oversite was the primary reason for the financial crisis in 2008. It has not been entirely fixed, but the banks are being much more closely monitored today than they were back then. As far as another tech crash goes, valuations today are still a far cry from what they were in 1999 or early 2000.

 

There are also two months remaining to DJIA’s and S&P 500’s “Best Six Months” and four for “NASDAQ’s Best Eight Months.” Combining usually favorable seasonality with the modestly improved technical and fundamental picture suggests considering reestablishing positions in previously stopped out “Best Months” ETFs, DIA, SPY, QQQ and IWM. These will not be full positions as volatility is still elevated and we want to preserve some cash for other opportunities. Please refer to updated ETF portfolio below for buy limits and stop losses. 

 

As an additional hedge to taking on these partial long positions, AdvisorShares Ranger Equity Bear (HDGE) also appears as an open trade idea in the portfolio. Should the market break down to new closing lows, we will exit DIA, SPY, QQQ and IWM and simultaneously establish a position in HDGE.