ETF Trades: Prepping for Annual Buying Spree By: Christopher Mistal | October 04, 2018 | Email | Print

For 52 years the new edition of the Stock Trader’s Almanac has been released in the fourth quarter of the year. And for the past seventeen 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 2019 pages 92, 94 and 96) 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 2019 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. Because these indexes are not directly tradable, highly correlated exchange-traded funds (ETFs) are typically chosen to execute trades. Performance over the last 5-, 10- and 15-year time periods is included. We prefer to focus on the 15-year average performance as this period has sufficient data to be seasonally significant. 

 

 

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 thirteen 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 $200.25. The stop loss is $180.23 and auto sell is $255.52. Top 5 holdings are: FedEx, Norfolk Southern, Union Pacific, JB Hunt Transport and United Parcel Service. 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 5.0%, but for the last 5 years the average has slipped to 3.7% 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 $29.24 and stop loss of $26.32. If above average gains materialize, take profits at the auto sell of $33.77. Top 5 holdings are: AT&T, Cisco, Verizon, T-Mobile and Motorola. Aggressive competition has not been kind to growth, but IYZ does boast a 12-month trailing yield of 3.27% yield and new offerings could bring consumers in for an upgrade during the holidays.

 

 

Semiconductors come into favor near October’s end and remain so until the beginning of December. This trade has averaged 8.9% and 7.8% 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 $178.48 and utilize a stop loss of $160.63. Take profits at the auto sell of $213.80. Top 5 holdings are: Broadcom, QUALCOMM, NVidia, Intel and Texas Instruments. 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, refrigerators, 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 13.6% and Staples 8.5%. SPDR Consumer Discretionary (XLY) and SPDR Consumer Staples (XLP) are the preferred vehicles to execute these trades. XLY can be considered on dips below $112.10. An initial stop loss of $100.89 and an auto-sell at $140.08 are suggested. XLY Top 5 holdings are: Amazon.com, Home Depot, McDonald’s, NIKE, and Booking Holdings. XLP could be purchased on dips below $53.05. Maintain the existing stop loss at $45.00 and use an auto-sell of $63.32. XLP Top 5 holdings are: Procter & Gamble, Coca-Cola, Pepsi, Walmart and Philip Morris. 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 is rather blurry with each sector averaging gains of 15.8% and 11.9% 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 $27.95 and a stop loss of $25.16 once a position has been entered. The auto sell is $35.45. 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. Rising interest rates combined with a robust labor market could 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 9.2% average return over the past five years while Pharmaceutical alone has been just 5.3%. 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 $92.75. The stop loss is $83.17 and auto sell is $111.41. Top five holdings are: Johnson & Johnson, Pfizer, UnitedHealth Group, Merck and AbbVie. XLV is also an existing position in the portfolio. If you already own, continue to hold the existing position, if you do not currently hold a new position can be considered.

 

 

Industrials have a favorable period that runs from the end of October through the middle of May with historical returns averaging 11.0% over the last 15- year period. Buy SPDR Industrials (XLI) with a buy limit of $76.50. Once purchased, set a stop loss of $68.85 and an auto sell of $93.41. Top 5 holdings are: Boeing, 3M Co, Honeywell, Union Pacific and General Electric. If growth has accelerated to a higher rate as recent GDP readings have suggested, eventually the materials sector will catch up. The new trade deal between U.S., Canada and Mexico earlier this week suggests the worst of the trade war could be over.

 

 

Materials have a favorable period that runs from the beginning of October through the beginning of May with historical returns of 15.1% over the last 15- year period. Buy SPDR Materials (XLB) with a buy limit of $56.90. Once purchased, set a stop loss of $51.21 and an auto sell of $72.04. Top 5 holdings are: Du Pont, Praxair, Ecolab, Sherman-Williams and Air Products & Chemicals. If growth has accelerated to a higher rate as recent GDP readings have suggested, eventually the materials sector will catch up. Cover the existing short position in XLB. For tracking purposes, it will be closed out of the portfolio using its average price on October 5, 2018.

 

 

Computer Tech comes into favor in early October and remains so until the beginning of January. This trade has averaged 9.3% and 9.4% 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 $72.05 and employ a stop loss of $64.85. Take profits at the auto sell of $86.63. Top 5 holdings are: Apple, Microsoft, Visa, Cisco and Intel. Apple is the largest current holding, at 20.47% of total assets. 

 

 

Real Estate has seen returns of 10.1% and 4.1% 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 $76.20 and a stop loss of $68.58 once a position has been entered. The auto sell is $92.29. Top 5 holdings are: Vanguard Real Estate II Index fund, American Tower, Simon Property Group, Crown Castle Intl. and Prologis.

 

 

 

In recent days some of the defensive positions held in the portfolio have weakened. Bond funds TLT and AGG have slipped back into the red (excluding any dividends or trading fees). 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 and AGG until when we issue our Seasonal MACD Buy Signal. In the meantime, a 1% trailing stop loss is suggested. Use daily closing prices for TLT and AGG to update the stop loss.

 

The short position in IYT was stopped out in mid-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 5. 

 

SPDR Utilities (XLU) is also on Hold. Its favorable season also ends in October. Here again utilize a 1% trailing stop loss, updated daily using the closing price of XLU.