ETF Trades & Seasonal MACD Update: Holding On During the Bounce
By: Christopher Mistal
April 05, 2018
Seasonal MACD Update
April, the last month of DJIA and S&P 500 “Best Six Months,” began with a shellacking, but broad weakness existed long before the first trading day. Both the faster and slower MACD indicators applied to DJIA and S&P 500 turned negative in mid-March. As of today, the faster moving MACD indicator applied to DJIA and S&P 500 is positive (see red arrows in charts below). Even DJIA’s slower moving MACD indicator is positive (blue arrow). S&P 500’s slower moving indicator (blue arrow) is on the verge of a positive crossover. These positive MACD crossovers are confirmation of recent market strength and a possible shift in momentum toward further gains.
[DJIA Daily Bar Chart]
[S&P 500 Daily Bar Chart]
Continue to hold long positions associated with DJIA’s and S&P 500’s “Best Six Months.” We will issue our Seasonal MACD Sell signal when corresponding MACD Sell indicators applied to DJIA and S&P 500 both crossover and issue a new sell signal.
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 5.1 to 7.9% which sets them up as a reasonably good short trade candidates during the spring and early summer months. Although not published in the Stock Trader’s Almanac 2018 on page 92, 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 ETFs. 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 outright 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.
Because there is a corresponding long position in the banking sector (XLF) already in the portfolio, we will look to short this sector at resistance or when we issue our Seasonal MACD Sell Signal Alert. If the short trade in XLF hits its execution price before our Seasonal MACD Sell Signal, the corresponding long position could be sold prior to implementing a short position.
[SPDR Financial (XLF) Daily Bar Chart]
SPDR Financial (XLF) could be shorted just above resistance at $29.26. After peaking with the broad market in late January, XLF has been under pressure since. It has slipped below its 50-day moving average and Stochastics, relative strength and MACD are all weak. However, Q1 earnings reports do have the potential to trigger a bounce higher. If shorted, set an initial stop loss at $30.30. The Fed appears to be on a prolonged and steady tightening cycle that is actually flattening the yield curve as longer-term growth and inflation expectations appear to be keeping the long end of the Treasury yield curve well anchored. This flatter curve could squeeze profits.
[iShares DJ Transports (IYT) Daily Bar Chart]
iShares DJ Transports (IYT) could be shorted on a rally toward resistance around $194.63. Stochastics, MACD and relative strength are currently mixed. Relative strength is neutral; Stochastics are improving and MACD is on the cusp of a positive “buy” crossover. 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 $200.00. Proposed tariffs have the potential to trigger even more tariffs and possibly a full-blown trade war. Trade and growth would likely suffer and transports would likely be the first to suffer the negative impacts.
[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 $50.10. JDST is volatile due to its 3x leverage and frequently trades in a wide daily range. If purchased set an initial stop loss at $44.10. Consider taking profits on any jump above $75.00. Interest rates are rising and gold has struggled to trade above $1350 per ounce going all the way back to 2013. Even during recent market volatility $1350 has not held.
[SPDR Materials (XLB) Daily Bar Chart]
SPDR Materials (XLB) could be shorted on a rally back toward resistance near $60.40. XLB had enjoyed a solid rally with the rest of the market right up until the end of January. Since then, it has been lower, sideways and lower again. It’s Stochastic, MACD and relative strength indicators are beginning to improve. A rally back near resistance would likely make a great entry point for a new short position. A stop loss at $64.10 is suggested.
ETF Portfolio Updates
Following a challenging February, March saw little improvement as DJIA, S&P 500 and NASDAQ all finished the month lower. Somewhat encouraging was a 1.1% gain by the Russell 2000. This pattern of broad weakness is prevalent throughout the ETF Portfolio with many positions edging lower and three being stopped out. iShares Russell 2000 (IWM) was the only position that gained ground in March, improving from down 2.5% to down just 0.8%.
SPDR Materials (XLB) and SPDR Consumer Staples (XLP) were two of the positions stopped out in March. XLB lost ground as fear that proposed tariffs could dampen global growth and demand. Large-cap, multi-national corporations that comprise XLP’s top holdings were also sold-off for similar reasons. These fears also resulted in gold rising which in turn caused DB Gold Double Short (DZZ) to decline and close under its stop loss.
However, all of March’s weakness did offer an opportunity to add SPDR Utilities (XLU) to the portfolio on multiple trading days throughout the month. The first opportunity was the day after it was presented when it opened below its buy limit of $49.20 and was added to the portfolio using its average price of $49.03 on March 2. At yesterday’s close XLU was up 2.5%.
April is typically a top performing month of the year. It has been up 12 straight years in a row. It is the first month of a quarter and it also hosts the first earnings announcements for the New Year. But, it is also the last month of the “Best Six Months” for DJIA and S&P 500. With this in mind, we maintain a long bias in the ETF Portfolio with a watchful eye on technical indicators. When we issue our Seasonal MACD Sell Signal Alert, we will reduce long exposure and look to execute the best setup short-trade ideas at that time. Until then, all long positions remain on hold. Please see table below for current stop losses and advice.
[Almanac Investor ETF Portfolio – April 4, 2018 Closes]
Disclosure Note: At press time, officers of the Hirsch Organization, or accounts they control held positions in IWM, QQQ, XLP and XLV.