ETF Trades: “Best Six/Eight Months” Buying Spree By: Christopher Mistal | September 20, 2016 | Email | Print

For 50 years the new edition of the Stock Trader’s Almanac has been released early in the fourth quarter. And for the past fifteen years we have been preparing Almanac Investor readers for the annual October ETF buying spree. This year is no exception, but before delving into October’s seasonalities, let’s do a quick review for new and seasoned followers alike. 

 

Every year while preparing the annual Almanac, we revisit and analyze our sector seasonalities (STA 2017 pages 94, 96 and 98) in depth in order to make adjustments for any new or developing trends. There have been a few minor revisions made to our Sector Seasonalities table in recent years, but for the most part, sector seasonality has been reasonably on track since September 2009 with many sectors producing the bulk of their annual gains during their traditionally favorable periods. Years of sector research allows us to specify whether the seasonality starts or finishes in the beginning third (B), middle third (M) or last third (E) of the month based upon the number of trading days in the month. 

 

The 2017 Almanac table follows. Keen observers and long-time readers will note the absence of several indices. Indices that no longer appear are no longer being calculated or are not readily available in the public domain. In the place of discontinued indices we have added S&P Sector indices. Both long and short trade opportunities are researched and the most statistically viable appear below. 

 

 

These entry and exit points will be the basis for our seasonal trades over the coming year. They are guidelines, as we generally look to enter new positions before the start of the favorable period and exit before its end. Occasionally a trade is closed out well in advance of the seasonality’s end. An outsized advance may trigger a trade at the suggested auto-sell price (a price target based upon past historical performance of the specific seasonality) or should strength fail to materialize, a stop loss could be reached.

 

There are twelve sector seasonalities that enter their favorable periods in October. The following trade ideas are made based upon these seasonalities. Currently, all buy limits are below current market levels. Should the market continue to struggle prior to our Seasonal MACD Buy Signal, triggering sometime on or after October 3, we want to take advantage of the pullback to begin accumulating the following new positions.

 

 

Transports enter their historically favorable season at the beginning of October and it runs until May. iShares DJ Transports (IYT) is attractive below current levels with a buy limit of $137.00. The stop loss is $123.30 and auto sell is $179.79. Top 5 holdings are: FedEx, United Parcel Service, Union Pacific, Norfolk Southern and Kansas City Southern. With nearly 70% of U.S GDP coming from consumers, seasonal strength in the consumer sector overlaps nicely with the transportation sector. If IYT trades below its buy limit, cover the IYT short trade and simultaneously establish a new long position.   

 

 

Over the last 15 years, Telecom has generated an average return of 8.1%, but for the last 5 years the average has slipped to 3.1% during its bullish seasonality from the middle of October through yearend. The top ETF within this sector is iShares DJ US Telecom (IYZ). Use a buy limit of $31.10 and stop loss of $27.99. If above average gains materialize, take profits at the auto sell of $36.98. Top 5 holdings are: AT&T, Verizon, Level Communications, T-Mobile and CenturyLink. Aggressive competition has not been kind to growth, but IYZ does boast a 2.33% yield and new product offerings could bring consumers in for an upgrade for the holidays.

 

 

Semiconductors come into favor near October’s end and remain so until the beginning of December. This trade has averaged 12.9% and 7.5% gains over the last 15- and 5-year periods, respectively. iShares PHLX Semiconductor (SOXX) is the top selection. Establish new positions with a buy limit of $104.05 and utilize a stop loss of $93.65. Take profits at the auto sell of $129.22. Top 5 holdings are: Intel, Texas Instruments, QUALCOMM, NVidia and Broadcom. These are the companies that design and supply the brains for most of our favorite electronic devices; smart watches, smart phones, PCs, tablets, toaster ovens, basically you name it.

 

 

Although consumer spending is spilt into two distinct sectors, Discretionary and Staples, their favorable seasons run concurrently from the beginning of October to the beginning of June in the following year. Over the past 15-years Discretionary has an average gain of 14.1% and Staples 8.4%. SPDR Consumer Discretionary (XLY) and SPDR Consumer Staples (XLP) are the preferred vehicles to execute these trades. XLY can be considered on dips below $75.35. An initial stop loss of $67.82 and an auto-sell at $94.57 are suggested. XLY Top 5 holdings are: Amazon.com, Comcast, Home Depot, Walt Disney and McDonald’s. XLP could be purchased on dips below $52.05. Set a stop loss at $46.85 and auto-sell of $62.06. XLP Top 5 holdings are: Procter & Gamble, Coca-Cola, Philip Morris, Altria and Walmart.

 

 

The line between Broker/Dealer and Banking sectors has become increasingly fuzzy in recent years with each sector averaging gains of 22.8% and 18.9% over the last 5 years, respectively. Instead of trading two smaller, somewhat less liquid ETFs, SPDR Financial (XLF) is the better choice. Use a buy limit of $19.05 and a stop loss of $17.15 once a position has been entered. The auto sell is $23.53. Its holdings cover all things financial from insurance companies to stock exchanges. Top 5 holdings are: Berkshire Hathaway, JPMorgan Chase, Wells Fargo, Bank of America and Citigroup. The Fed has delayed raising rates again and again and again, but at some point they will go higher. A steepening yield curve combined with a reasonably healthy labor market should give this group a boost. (Editor’s note: XLF chart has not been adjusted for the 9/16/2016 special dividend due to the restructuring of major S&P 500 sectors which gives real estate its own sector.)

 

 

Yet another area exhibiting a reasonable amount of overlap is the Healthcare and Pharmaceutical sectors, at least as far as many ETFs are concerned. Healthcare has racked up a rather impressive 18.3% average return over the past five years while Pharmaceutical alone has been just 7.7%. SPDR Health Care (XLV) does an excellent job of representing both sectors and comes with the added bonus of holding several well-established biotechnology companies as well. XLV is attractive near current levels with a buy limit of $71.10. The stop loss is $63.99 and auto sell is $85.17. Top five holdings are: Johnson & Johnson, Pfizer, Merck, UnitedHealth Group and Amgen. Whether we like it or not, Obamacare seems to be here to stay. It mandated coverage or a fine and did little to control prices in the sector. Greater access to services and an aging population should translate into solid sector growth.

 

 

Materials have a favorable period that runs from the beginning of October through the beginning of May with historical returns of 18.1% over both the last 15- and 5- year periods. Buy SPDR Materials (XLB) with a buy limit of $45.15. Once purchased, set a stop loss of $40.64 and an auto sell of $58.65. Top 5 holdings are: Dow Chemical, Du Pont, Monsanto, Praxair and Ecolab. Tepid global growth has kept a lid on the materials sector and XLB is still below its highs from early 2015. Any under-investment now could easily lead to a supply crunch when growth does begin to accelerate resulting in higher prices for the products produced and eventually to higher profits and stock prices.

 

 

Computer Tech comes into favor in early October and remains so until the beginning of January. This trade has averaged 13.7% and 7.7% gains over the last 15- and 5-year periods, respectively. SPDR Technology (XLK) is the top selection. Enter this trade with a buy limit of $45.90 and employ a stop loss of $41.31. Take profits at the auto sell of $57.41. Top 5 holdings are: Apple, Microsoft, Facebook, AT&T and Alphabet. Apple is the largest current holding, at 13.82% of total assets. Smartphones and tablets are continually replacing desktops and laptops. Cloud-based applications and storage are also growing. Many of XLK’s holdings are well positioned to profit from these trends either directly or indirectly.

 

 

Real Estate has seen returns of 13.2% and 13.0% over the last 15 and 5 years respectively from the end of October to the beginning of May. Vanguard REIT (VNQ) is our choice this year. Use a buy limit of $82.05 and a stop loss of $73.85 once a position has been entered. The auto sell is $102.17. Top 5 holdings are: Simon Property, Public Storage, Prologis, Welltower and Equinix. Although sensitive to interest rates, this trade provides exposure to rental markets, commercial and residential, which have been performing well recently.

 

 

 

Defensive positions in TLT, HDGE and AGG are on hold. We will likely continue to hold these positions until the “Best Six/Eight Months” officially begin sometime on or after October 3 when we issue our Seasonal MACD Buy Signal Alert.

 

iShares NASDAQ Biotech (IBB) and iShares US Tech (IYW) can be considered on dips below their respective buy limits. IBB and IYW buy limit, stop loss and auto-sell prices have been adjusted to take into account recent strength.