ETF Trades: Renewed Growth Concerns + Weak Seasonal Period = 4 Short Trade Ideas
By: Christopher Mistal
April 07, 2016
April, DJIA’s best performing month of the year since 1950, has not gotten off to a great start. April 1 and April 6 were solid, but the other three trading days were losers and DJIA is down 0.8% for the month as of today’s close. Once again, earnings and global growth concerns are at the top of the list of reasons for today’s selloff.
[DJIA Daily Bar Chart]
[S&P 500 Daily Bar Chart]
[NASDAQ Daily Bar Chart]
Just a few days of weakness has caused Stochastic, relative strength and MACD indicators applied to DJIA, S&P 500 and NASDAQ to turn negative. The shift in momentum also occurred within a few percentage points of the highs from Q4 of last year for DJIA and S&P 500. NASDAQ’s rally off the February lows was not as strong and it came up well short of its highs. It now appears the market’s next move will be lower. DJIA 17000, S&P 500 1993 and NASDAQ 4725, last month’s monthly pivot point resistance level (red dashed line in March on each chart above), appear to be the first area of support.
May Sector Seasonalities
Three sectors begin seasonally weak periods in May: Banking, Gold & Silver (stocks) and Materials. Over the past 15 years, all three sectors have declined on average 6.6 to 7.6% which sets them up as good short trade candidates during the spring and early summer months. Although not published in the Stock Trader’s Almanac 2016 on page 94, Transports also exhibit seasonal weakness from early May through late June with an average loss of 5.7% over the past 15 years.
Typically we like to take advantage of sector weakness through the use of inverse or bearish sectors. By doing so, the trade is similar to any other long trade that we choose to execute. One of the drawbacks of inverse ETFs is they frequently employ leverage and only track the daily performance of the underlying benchmark. As holding periods get longer, these types of funds often exhibit performance that differs significantly from the underlying security or index’s performance due to compounding and tracking errors. Three out of today’s four new trade ideas are going to be short trades. An “(S)” follows each ETF name in the portfolio table to denote it is a short trade. Only in the case of Gold & Silver will we use a leveraged inverse fund as its seasonally weak period is only about six weeks long.
[SPDR Financial (XLF) Daily Bar Chart]
SPDR Financial (XLF) could be shorted under $22.00 as it has fallen below its monthly pivot (blue dashed line) and its technical indicators are all negative. Should XLF bounce back above $22.00, it could be shorted at $23.15, monthly resistance (red dashed line). Set an initial stop loss at $24.05 and take profits at $18.30. Rising interest rates and a steepening yield curve were expected to lift banks’ profits, but the Fed appears to be on hold and the yield curve is flattening.
[iShares DJ Transports (IYT) Daily Bar Chart]
iShares DJ Transports (IYT) could be shorted on a rally toward resistance near $147.94 or on a break down below $137.00. Stochastic, MACD and relative strength are all currently weak. IYT could easily bounce or just fall apart. Crude oil’s price could provide an early indication of which way it may be. The initial stop loss is $150.07 while profits can be taken at $112.88. Tepid global growth should mean less trade which means fewer shipments for the transports to move.
[Direxion Daily Jr Gold Miners Bear 3X (JDST) Daily Bar Chart]
Direxion Daily Jr Gold Miners Bear 3X (JDST) can be bought on dips below $4.45. JDST is volatile due to its 3x leverage and frequently trades in a wide daily range. If purchased set an initial stop loss at $4.15. Consider taking profits on any jump above $6.17.
[SPDR Materials (XLB) Daily Bar Chart]
SPDR Materials (XLB) could be shorted on a rally back toward resistance near $46.36 or on a break down through its 200-day moving average currently at $43.67. XLB had enjoyed a solid rally from late January till roughly now, it’s Stochastic, MACD and relative strength indicators have all turned negative though. A stop loss at $47.05 is suggested and profits can be taken at $36.47.
ETF Portfolio Updates
In accordance with Tuesday’s Alert, existing positions in VNQ, JJC, DIA and SPY have been closed out of the portfolio. For tracking purposes these positions were exited at their respective “open” prices on April 6.
Now that the “Best Six Months” for DJIA and S&P 500 have officially come to an end, we are shifting the portfolio toward an overall market neutral stance. Continue to Hold long positions associated with the NASDAQ’s “Best Eight Months” while considering some defensive bond and bearish ETF (HDGE) positions. We will consider a more defensive posture when NASDAQ’s favorable period ends or sooner should the market begin to unravel in earnest.
[Almanac Investor ETF Portfolio – April 6, 2016 Closes]
Disclosure Note: At press time, officers of the Hirsch Organization, or accounts they control held positions in USO and XLU.