ETF Portfolio Updates: Bonds Ease, Other Defensive Sectors Pay Off
By: Christopher Mistal
August 02, 2018
July’s employment situation report, typically released on the first Friday of August, has largely been a market disappointment over the last seventeen years. DJIA, S&P 500, NASDAQ, Russell 1000 and Russell 2000 have all declined a majority of the time. Average, historical performance on the day has been negative with Russell 2000 declining the most, off 0.55%. Across the board strength in four of the last six years has improved average performance as the prior twelve year stretch was nearly all bearish.
[Performance (%) on Employment Report Date in August Table]
Yesterday’s ADP private sector employment report showed 219k jobs were added in July. This was well above the consensus estimate of 185k and the report also came with an upward revision to June’s number. This suggests that tomorrow’s employment situation report could be solid as well. Current estimates are looking for around 193k net new jobs being added in July and the unemployment rate is anticipated to decline to 3.9% from 4%.
Solid labor market numbers have become a double-edged sword for the market. More people employed means more money to spend, but it also puts pressure on inflation expectations and the Fed to continue to tightening monetary policy by raising interest rates. Higher rates are already starting to hit the housing market and have sent ripples through some emerging markets. Tariffs and isolationist trade policy is a real concern, but the Fed is the biggest risk to the economy. If they tighten too quickly or too much they run the risk of triggering a recession as growth remains fickle. 
New Trade Ideas for August Seasonalities
Biotechnology sector enters its historical favorable season in August. iShares NASDAQ Biotech (IBB) could be bought on dips below $112.00. Maintain the existing stop loss at $100.27. The auto sell is $141.31 based upon historical average performance and the new buy limit. A 14.7% average gain has occurred over the last 15 years while an average gain of 18.3% has taken place the most recent 5 years. Top five holdings are: Biogen, Gilead Sciences, Amgen, Celgene and Illumina. This sector has been slowly recovering since falling from grace in mid-2015. Prescription drug prices are in the spotlight, but this sector has the potential to cure disease, not just treat symptoms.
IBB is an existing position in the portfolio that is being held for its historical track record of performing reasonably well during the “Worst Months,” May through October. If IBB trades below its buy limit we will officially add to the existing position. If you currently do not own a position in IBB, it can be considered on dips below its buy limit of $112.00.
[iShares NASDAQ Biotech (IBB) Daily Bar Chart]
Over the last 15 years, High-Tech has generated an average return of 12.0%, and for the last five years the average has been 7.4% during its bullish season from mid-August to mid-January. Our top ETF within this sector is iShares DJ US Tech (IYW). A buy limit of $179.90 and stop loss of $161.95 are appropriate. If high-tech produces above average gains, profits will be taken at the auto sell of $221.70. IYW’s top five holdings are: Apple, Microsoft, FB, GOOG and INTC. These five holdings represent 53.95% of IYW’s total holdings. Tech has been an unstoppable freight train of returns and that trend is likely to continue.
[iShares DJ US Tech (IYW) Daily Bar Chart]
ETF Portfolio Updates
The summer doldrums and the worst two-month span (August-September) of the year have arrived. After briefly faltering at the end of July, technology shares have reasserted themselves into the leadership role. As a result, NASDAQ and S&P 500 are now higher than their respective July closes. DJIA is still lagging. Due to recent market strength many of the defensive positions that were modestly positive last update are now slightly negative. iShares 20+ Year Bond (TLT) and iShares US Aggregate Bond (AGG) were down a fraction of a percent at yesterday’s close.
However, other defensive positions have held up. SPDR Utilities (XLU) is still up 6.6% since its addition to the portfolio. SPDR Healthcare (XLV), iShares NASDAQ Biotechnology (IBB) and SPDR Consumer Staples (XLP) have all advanced over the last month. With the exception of IBB, all of these defensive positions are currently on Hold.
Last month’s new trade ideas in gold and silver, GDX, GLD and SLV, did not pan out. All three were added in the first half of July and all three were then quickly stopped out. Higher interest rates and tightening monetary policy, globally, is likely to blame for the lack of investment interest in precious metals and the stocks that mine them. Gold’s current trajectory suggests it could be headed to test its lows from late 2016 while silver looks like it is on its way to its lows from late 2015. Considering the current geopolitical environment, gold and silver could also just as quickly find support and rebound.
iShares Transports (IYT) was shorted on July 26 when it traded above $197.02. Its stop loss has been raised to $207.00 which is just above its all-time intra-day high traded in January. If new tariffs do begin to dampen global trade, then this sector should be one of the first to feel the effects of reduced trade. Hold the IYT short position.
Please see table below for current advice and stop losses.
[Almanac Investor ETF Portfolio – August 1, 2018 Closes]