ETF Trades: Summer Doldrums Arrive, Bonds & Defense Best
By: Christopher Mistal
August 01, 2019
July’s employment situation report, typically released on the first Friday of August, has largely been a market disappointment over the last eighteen 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 0.54%. Nearly across-the-board strength in five of the last seven years has improved average performance as the prior eleven-year stretch was nearly all bearish.
[Performance (%) on Employment Report Date in August Table]
Yesterday’s ADP private sector employment report showed 156k jobs were added in July. This was modestly better than the consensus estimate of 150k 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 165k net new jobs being added in July and the unemployment rate is anticipated to decline to 3.6%.
Historically, the employment report has been an important data point that the Fed monitored closely. Tomorrow’s report is not likely to be all that important as what happens next in the trade dispute with China. The Fed gave the market a small cut and an early ending to quantitative tightening on Wednesday and the market failed to advance. And today the market responded harshly to the report of additional tariffs on China. It would appear what the market is really longing for is an end to trade turmoil with China. 
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 $91.00 [this is not a typo]. An initial stop at $81.90 is suggested. The auto sell is $132.75 based upon historical average performance. A 16.7% average gain has occurred over the last 15 years while an average gain of 18.0% has taken place the most recent 5 years. Top five holdings are: Amgen, Gilead Sciences, Celgene, Illumina and Vertex Pharmaceuticals.
[iShares NASDAQ Biotech (IBB) Daily Bar Chart]
Over the last 15 years, High-Tech has generated an average return of 12.5%, and for the last five years the average has been 10.8% 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 $150.00 and stop loss of $135.00 are also not errors. If high-tech produces above average gains, profits will be taken at the auto sell of $210.94. IYW’s top five holdings are: Microsoft, Apple, Alphabet, Facebook and Cisco. These five holdings represent 52.77% of IYW’s total holdings. Tech has been an unstoppable freight train of growth and performance, that trend is likely to continue.
[iShares DJ US Tech (IYW) Daily Bar Chart]
Why are these buy limits seemingly so low? The simplest answer is a repeat of last December’s market rout is an increasingly likely scenario now. The market did not immediate shoot higher when the Fed delivered and its response to additional tariffs today is a reminder that hard-fought gains can quickly vanish. The market’s brisk reversal also appears to signal that the Fed and interest rates are not the real concern any more, it is trade.
Sector Rotation ETF Portfolio Updates
The summer doldrums and the worst two-month span (August-September) of the year have arrived. The Sector Rotation ETF Portfolio is mostly well-positioned for the next two months. Defensive positions in XLP, XLV and XLU have held up and continue to produce dividends. Gold and silver positions have not yet been added to the portfolio as their trajectory over the past two months has been higher with only slightest hint of an occasional pullback. VanEck Vectors Gold Miners (GDX), SPDR Gold (GLD) and iShares Silver (SLV) can all be considered on dips below their respective updated buy limits.
Seasonal Sector trade ideas from June and July have been added to the portfolio table below. June’s trades in livestock and broader commodities, COW and DBA, traded below their respective buy limits in mid-June. DBA has since been stopped out while COW remains with a small loss. Seasonal strength in live cattle typically lasts through the end of the year and into the next which could provide time for COW to recover. DBA is likely to continue to slip lower as China’s only real response to additional tariffs is to hit our agricultural sector with tariffs or even a boycott.
Two new positions that could benefit from further market weakness have been added to the portfolio. iShares Transportation (IYT) was shorted in mid-July when it first broke out above resistance. IYT short position is on hold. The criteria to establish a position in ProShares UltraShort S&P 500 (SDS) was satisfied today when SPDR S&P 500 (SPY) broke down through $295. SDS was added to the portfolio using today’s closing price and is on Hold. A 3.5% trailing stop loss is suggested for SDS. Update the stop using daily closing prices.
Please see table below for current advice, updated buy limits and stop losses.
[Almanac Investor SR ETF Portfolio – August 1, 2019 Closes]
Tactical Seasonal Switching ETF Portfolio Update
In accordance with our Seasonal MACD Sell Signal for NASDAQ issued before the market’s open on July 22, remaining long positions in Invesco QQQ (QQQ) and iShares Russell 2000 (IWM) have been closed out. The combination of our initial purchase last year and additional purchases in January resulted in an average return of 10.5% for tech and small-cap positions. Tech was the biggest winner with both NASDAQ positions returning an average 16.5% in slightly less than nine months.
Defensive, “Worst Months” positions in the portfolio have been performing well. iShares 20+ Year Treasury Bond (TLT) has a 9.5% gain as of today’s close. AGG and BND are also positive with gains of 3.3% and 3.5% respectively. As a reminder, the more diverse maturities held by AGG and BND are likely to exhibit a greater degree of price stability while also returning a yield that is comparable to TLT. If you are risk adverse, AGG and BND may be a better choice over more price volatile TLT.
AGG, BND and TLT can still be considered on dips below their respective buy limits.
[Almanac Investor TSS ETF Portfolio – August 1, 2019 Closes]