ETF Trades: Prepare for “Best Months” Buying By: Christopher Mistal | October 05, 2017 | Email | Print

For 51 years the new edition of the Stock Trader’s Almanac has been released early in the fourth quarter. And for the past sixteen 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 2018 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 2018 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 struggle prior to our Seasonal MACD Buy Signal, 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 $174.56. The stop loss is $157.10 and auto sell is $227.15. Top 5 holdings are: FedEx, Norfolk Southern, United Parcel Service, Union Pacific 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.   

 

 

Over the last 15 years, Telecom has generated an average return of 8.2%, but for the last 5 years the average has slipped to 3.6% 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 $30.85 and stop loss of $27.77. If above average gains materialize, take profits at the auto sell of $36.72. 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 2.88% 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 11.1% and 8.9% 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 $154.96 and utilize a stop loss of $139.46. Take profits at the auto sell of $189.38. Top 5 holdings are: Intel, Texas Instruments, NVidia, QUALCOMM 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, actions cameras, drones, 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 14.5% and Staples 9.5%. SPDR Consumer Discretionary (XLY) and SPDR Consumer Staples (XLP) are the preferred vehicles to execute these trades. XLY can be considered on dips below $89.72. An initial stop loss of $80.75 and an auto-sell at $113.00 are suggested. XLY Top 5 holdings are: Amazon.com, Home Depot, Comcast, Walt Disney and McDonald’s. XLP could be purchased on dips below $54.20. Set a stop loss at $48.78 and auto-sell of $65.28. XLP Top 5 holdings are: Procter & Gamble, Coca-Cola, Philip Morris, Altria and Walmart. XLP is an existing holding in the ETF Portfolio. If you already own, continue to hold the existing position, if you do not currently hold a new position can be considered. 

 

 

The line between Broker/Dealer and Banking sectors has become increasingly fuzzy in recent years with each sector averaging gains of 19.1% and 16.7% 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 $25.30 and a stop loss of $22.77 once a position has been entered. The auto sell is $31.09. Its holdings cover all things financial from insurance companies to stock exchanges. Top 5 holdings are: Berkshire Hathaway, JPMorgan Chase, Bank of America, Wells Fargo and Citigroup. A steepening yield curve combined with a sound labor market should give this group a boost.

 

 

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 15.8% average return over the past five years while Pharmaceutical alone has been just 6.0%. 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 $81.68. The stop loss is $73.51 and auto sell is $98.29. Top five holdings are: Johnson & Johnson, Pfizer, UnitedHealth Group, Merck and AbbVie. Obamacare appears to be here to stay in one form or another. It did little to control prices in the sector. Greater access to services and an aging population should translate into solid growth for the sector.

 

 

Materials have a favorable period that runs from the beginning of October through the beginning of May with historical returns of 17.1% over the last 15- year period. Buy SPDR Materials (XLB) with a buy limit of $56.01. Once purchased, set a stop loss of $50.41 and an auto sell of $72.15. Top 5 holdings are: Du Pont, Monsanto, Praxair, Ecolab and Air Products and Chemicals. If global growth is truly about to accelerate, eventually the materials sector will catch up.

 

 

Computer Tech comes into favor in early October and remains so until the beginning of January. This trade has averaged 11.1% and 6.1% 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 $58.61 and employ a stop loss of $52.75. Take profits at the auto sell of $71.63. Top 5 holdings are: Apple, Microsoft, Facebook, Alphabet and AT&T. Apple is the largest current holding, at 14.36% of total assets. Both share classes of Alphabet are also held and total 10.42% of total assets. Mega-cap tech continues to deliver solid growth. 

 

 

Real Estate has seen returns of 12.8% and 12.0% over the last 15 and 5 years respectively from the end of October to the beginning of May. Vanguard REIT (VNQ) is our choice. Use a buy limit of $83.02 and a stop loss of $74.72 once a position has been entered. The auto sell is $103.01. Top 5 holdings are: Simon Property, Equinix, Prologis, Public Storage and Welltower.

 

 

 

In recent weeks some of the defensive positions held in the portfolio have weakened. Bond funds TLT and AGG have slipped back toward breakeven (excluding any dividends or trading fees). Precious metals funds, GLD and SLV has also fallen as capital has been moving from safe-haven assets into riskier assets like stocks. Short positions have also gone against the portfolio during the current rally. These positions were held as part of an overall seasonal trading strategy that will from time to time underperform the broader market however, over the longer-term (years and even decades) has proven time and again to be an effective way to manage risk while steadily building wealth. We will continue to hold TLT, AGG, GLD and SLV until we issue our Seasonal MACD Buy Signal. 

 

Short positions in IYT and XLF were stopped out in late September (see table below). The materials sector short trade, XLB should be covered. Historical weakness generally comes to an end in mid-October. For tracking purposes, XLB will be closed out using its average price on October 6. 

 

SPDR Utilities (XLU) should be sold. Its favorable season also ends in October. For tracking purposes, XLU will be closed out using its average price on October 6. 

 

CurrencyShares Swiss Franc (FXF) should also be sold as its favorable season concludes in October. For tracking purposes, XLU will be closed out using its average price on October 6.

 

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 and the lack of any meaningful weakness in August or September.

 

 

Disclosure Note: At press time, officers of the Hirsch Organization, or accounts they control held positions in AGG, GLD, SLV, TLT, XLP and XLV. They did not hold any positions in the other ETFs mentioned in this Alert, but may buy or sell at any time.