Seasonal Sector Trades & ETF Portfolio Update: Crude’s Run Stalls & Keeping Defense on the Field By: Christopher Mistal | September 06, 2018 | Email | Print

Thus far solid market gains in August have not exactly carried over into September. DJIA is a slightly higher, but S&P 500 and NASDAQ are not. Looking back at past strong August performance there is a pattern of below average performance in September. The dividing line for “strong” August performance was drawn at each index’s respective performance this August. For example, any August since 1950 in which DJIA gained 2.2% or more was included. The same dividing line was used for S&P 500 going back to 1950 and NASDAQ since 1971.

 

 

Looking at the above table, September’s weaker performance following a “strong” August is quite visible. Compared to all Septembers since 1950, DJIA average performance following a “strong” August falls to a 1.2% loss compared to a 0.7% average decline in all Septembers. The frequency of positive Septembers also declines significantly from 39.7% in all Septembers to just 22.2% in Septembers after a “strong” August. S&P 500 and NASDAQ exhibit similar declines in September’s average performance. In the case of a “strong” August, strength does not equal continued strength all that often.

 

 

Seasonally speaking, crude oil tends to make significant price gains in the summer, as vacationers and the annual trek of students returning to college in August creates increased demand for unleaded gasoline. The market can also price in a premium for supply disruptions due to threats of hurricanes in the Gulf of Mexico. However, towards mid-September, we often see a seasonal tendency for prices to peak out, as the driving and hurricane seasons begin to wind down. Crude oil’s seasonal decline is highlighted in yellow in the above chart.

 

 

Shorting the February crude oil futures contract in mid-September and holding until on or about December 10 has produced 22 winning trades in the last 35 years. This gives the trade a 62.9% success rate and theoretical total gains of $94,400 per futures contract over the history of this trade. Following four consecutive years of gains, this trade failed to materialize the past two years. 

 

 

Over the last year, crude oil has enjoyed a solid run beginning just under $50 per barrel early in September 2017 to over $75 per barrel in July of this year. The rise in price has caused an increase in domestic production which is likely to put a cap on further price appreciation. A stronger U.S. dollar could also hinder further gains. Tariffs could also result in lower crude oil prices as growth could be hit. Easing demand and ample supply would suggest lower prices for crude in the near future could be likely.

 

 

ProShares UltraShort Bloomberg Crude Oil (SCO) is one vehicle to take advantage of seasonal weakness. SCO’s benchmark is the Bloomberg WTI Crude Oil Sub index which is comprised entirely of crude oil futures contracts. SCO is designed to return 200% of the inverse of the daily move of this index and has nearly $160 million in assets. Its expense ratio of 0.95% is about average for a leveraged, inverse ETF.

 

Crude oil’s recent weakness has caused a corresponding increase in SCO. As a result, stochastic, relative strength and MACD Buy indicators are all positive. SCO could be bought on dips below $15.55. SCO will be tracked in the Almanac Investor ETF Portfolio. If purchased, an initial stop loss at $14.00 is suggested.

 

 

A mild case of end-of-summer/back-to-school blues has cast a shadow over the market this first week of September following an unseasonably strong full-month of August. Technology shares in particular have been hit the hardest. Social media firms like Facebook and Twitter along with the semiconductor sector are amongst the hardest hit. The prospect of another round of tariffs, $200 billion more on China is also looming large over the market. Due to these recent market jitters, defensive bond positions held in the portfolio are again positive. Excluding dividends and any fees, iShares 20+ Year Bond (TLT) was up 0.8% at yesterday’s close. iShares US Aggregate Bond (AGG) was up 0.2%. TLT and AGG are currently on Hold.

 

Other defensive sector positions are performing even better. SPDR Utilities (XLU) is now up 10.7% and SPDR Consumer Staples (XLP) is up 9.3%. SPDR Healthcare (XLV) and iShares NASDAQ Biotech (IBB) are also performing well. XLV is up an additional 3.9% since last update in early August while IBB added 2.9%. With the exception of IBB, all of these defensive positions are also on Hold. 

 

Short trade positions in SPDR Materials (XLB) and iShares Transports (IYT) are also on Hold. Neither position has been a smashing success yet. XLB is modestly lower than where it was when first shorted for a gain of 1.9% while IYT is higher than when shorted for a loss of 4.0%. Both of these short trades typically last until the middle of October which leaves plenty of time for improvement. Additional tariffs are one possibility that could lead to weakness in the materials and transport sectors.

 

Last month’s new long trade idea from the High-Tech sector, iShares US Technology (IYW) has not traded below its buy limit. IYW’s buy limit at $179.95 appears to be well below its current price, but IYW has declined as much as $6.25 over the last two trading sessions. A few more days of similar declines is all it would take to reach the buy limit.

 

Please see table below for current advice and stop losses.