ETF Trades: Oil Returns to Favor in December By: Christopher Mistal | December 06, 2018 | Email | Print

Tomorrow morning the Bureau of Labor Statistics will release its Employment Situation report for November. Depending upon your preferred source, the consensus estimate is for a gain of approximately 200,000 net new nonfarm jobs. This would be even stronger than the 179,000 that ADP reported earlier today. Historically, the market has responded favorably to the jobs report released in December. S&P 500, NASDAQ, Russell 1000 and Russell 2000 have all advanced fourteen times in the last seventeen years. DJIA’s record has one more loss. Average gains range from a low of 0.46% by DJIA to 0.81% by Russell 2000.

 

 

Tomorrow’s jobs report will be the last one the Fed will see before they meet later this month. Currently, there is right around a 75% chance the Fed will hike rates again at it December meeting according to CME Group’s FedWatch Tool. A weaker jobs report could lessen the probability of another hike, but it does appear the Fed will likely hike regardless in December and instead shift focus onto 2019. Unemployment is low, and inflation appears to be under control, but economic growth is not exactly running away. The flattening (slightly inverted) Treasury yield curve also seems to be signaling that it may be time for the Fed to pause, but probably not until next year.

 

 

Oil companies typically come into favor in mid-December and remain so until late April or early May in the following year (yellow box in chart below). This trade has averaged 10.8%, 5.6%, and 7.8% gains over the last 15-, 10-, and 5-year periods. This seasonality is not based upon the commodity itself; rather it is based upon NYSE ARCA Oil & Gas index (XOI). This price-weighted index is composed of major companies that explore for and produce oil and gas. 

 

Crude oil and XOI have been tumbling since early October on increasing U.S. supplies and the Saudi’s producing at record levels causing a broad oversupply. Trade and global growth concerns are also weighing on demand. The condition of excess supply is widely known and will likely be corrected before crude oil falls much below $50 per barrel. 

 

 

SPDR Energy (XLE) is the top pick to trade this seasonality. A new position in XLE could be established on pullbacks with a buy limit of $63.50. Employ a stop loss of $57.15. Take profits at the auto sell of $77.39. Exxon Mobil is the top holding in XLE at 24.77%. The remaining top five holdings of XLE are Chevron, ConocoPhillips, EOG Resources and Occidental Petroleum.

 

 

Sector Rotation Portfolio Updates 

 

Recent market weakness has dampened the performance of most positions held in the Sector Rotation Portfolio. Average performance has been cut in half since last update with technology-related funds performing poorest. SPDR Technology (XLK) was stopped out on the close on November 20. XLK has rebounded modestly and is currently trading right around the level it was stopped out at. XLK’s top two holdings are Microsoft and Apple. Microsoft has been holding up well while Apple’s selloff appears to be overdone. A new position in XLK can be considered on dips up to a buy limit of $66.05.

 

SPDR Healthcare (XLV), SPDR Consumer Staples (XLP) and Vanguard REIT (VNQ) are the top performing positions in the portfolio. Their defensive nature has contributed to their resilience. XLV, XLP and VNQ can all still be considered on dips or at current levels. These positions could provide some cushion against any broad market volatility in the near-term.

 

All other positions in the portfolio not previously mentioned can also be considered near current levels or on dips. Please see table below for updated buy limits, stop losses and current advice for each position.

 

 

 

Although current market volatility seems unprecedented, it is not. Midterm years historically have seen volatility in October, November and sometimes into early December. The Fed is starting to take a more dovish tone. The Federal government may shutdown, but again, this has occurred before and the market powered through. Trade issues with China could end quicker than they started. We will stick to the time-tested strategy while paying close attention to incoming economic data and technical indicators.

 

Current weakness can be used to establish new positions or add to existing positions in DIA, IWM, QQQ, SPY.