ETF Trades: Three Reasons Why Energy Stocks Could Decline Soon
By: Christopher Mistal
August 02, 2016
August started off in somewhat typical fashion this year, selling off the first two days. We warned last week of weakness the first trading day of August. History also suggests that the first nine trading days of August are also likely to be weak. Since 1988, S&P 500 has been down 17 times in 28 years during the first nine trading days of August. Its average loss has been 1.02% and the median decline is 0.72%. DJIA, NASDAQ and Russell 2000 each have one fewer loss over the same time period, but the average decline remains approximately 1.0%. 
The tendency towards declines during the first nine days of August is likely due to an exodus from The Street as traders and investor kick it into summer overdrive mode as well as the fall off of excitement surrounding July earnings season. There appears to some correlation to July’s performance, but just barely. Following 14 S&P 500 July declines, 9 first-nine-trading-day periods in August were also down however, 14 S&P 500 up Julys were follow by 7 losing first-nine-day periods. 
However, when the first two days of August are down we have often seen the bulk of the early August decline. Fourteen times the first two days of August were down since 1988, like 2016, the next seven days were down 8 times, but with a positive average gain of 0.05% and a median loss of -0.21%. When the first two days of August are up, the next seven are down 10 of 14 times with S&P 500 losses averaging -1.22% (median -0.95%).
[First Nine Table]
New Trade Ideas for September Seasonalities
Oil’s historically weak seasonality begins in the beginning of September, usually lasts until the end of November and is based upon the AMEX Oil index (XOI). MACD, stochastic and relative strength indicators applied to XOI are all negative and have been so since mid-July. The average price decline of XOI during this period over the last 15 years has been 5.6% and this trade is setting up well, but a little early this year. First, oil has already dropped by over 20% since its early June highs. Second, gasoline inventories have not been declining as quickly as they typically do during the peak driving season. And third, inventories are still higher now than they were one year ago. When peak driving season comes to an end around Labor Day this year, oil, gasoline and energy stocks could easily fall faster and further than they typically do.
Aggressive traders may consider Direxion Energy Bear 3x (ERY) or ProShares UltraShort Oil & Gas (DUG) to take advantage of the sectors historically weak period however, both of these funds are leveraged and volatility is magnified. An outright short position in SPDR Energy (XLE) is the path we will take in the Almanac Investor ETF Portfolio. XLE has been trending lower since an early July top. It’s stochastic, relative strength and MACD indicators are all negative, confirming the trend lower. XLE could be shorted near resistance around $67.63 or on a breakdown through support around $64.97. A stop loss around $70.05 is suggested and profits can be taken if XLE falls below $57.46.
[SPDR Energy (XLE) Daily Bar Chart]
ETF Portfolio Updates
Per last update, United States Oil Fund (USO) was closed out of the Portfolio using its average price on July 6 for a 32.0% gain. Crude oil and USO have both fallen substantially since then. The short positions in SPDR Financials (XLF) and First Trust ISE-Revere Natural Gas (FSG) were also covered on the sixth for modest gains of 3.4% and 4.7% respectively.
Other recent trades include the covering of SPDR Materials (XLB) short position on July 15 when it closed above its stop loss along with the sale of iPath Bloomberg Livestock Sub-TR ETN (COW) and PowerShares DB Agriculture (DBA). COW and DBA both closed below their stop losses last month. All three positions were closed out with around a 5% loss for each.
A stellar July for the market afforded no opportunity to purchase iShares NASDAQ Biotech (IBB) or iShares DJ US Tech (IYW). IBB and IYW can still be considered on dips below their new buy limits. Due to the higher buy limits, stop losses and Auto-Sell prices have also be adjusted. See table below for updated IBB and IYW limits.
Our July S&P 500 short trade was executed somewhat early on July 8, but ProShares UltraShort S&P 500 (SDS) never closed below its stop of $16.52. With further market weakness possible, continue to Hold SDS.
Despite solid market gains for the full-month of July, defensive positions in AGG, HDGE and TLT have held up. As of yesterday’s close, TLT was the best up 5.3%. AGG, HDGE and TLT are on hold.
Almanac Investor ETF Portfolio - August 1, 2016 Closes
Disclosure Note: At press time, officers of the Hirsch Organization, or accounts they control held positions in AGG, HDGE, SDS and TLT.