ETF Trades: Get Ready for Seasonal Buying Binge By: Christopher Mistal | October 03, 2019 | Email | Print

For the past eighteen 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 2020 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 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 2020 Almanac table follows. Both long and short trade opportunities are researched and the most statistically viable appear below. Because indexes are not directly tradable, highly correlated exchange-traded funds (ETFs) are 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 continue to struggle prior to our Seasonal MACD Buy Signal, we want to take advantage of any weakness or pullback to begin accumulating the following new positions. Any positions left open, will be considered when we issue our Seasonal MACD Buy Signal for DJIA, S&P 500 and NASDAQ.

 

 

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 $173.75. The stop loss is $156.38 and auto sell is $252.15. Top 5 holdings are: Norfolk Southern, Union Pacific, FedEx, Kansas City Southern 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. Ongoing trade conflict is a risk, but negotiations are proceeding.

 

 

Over the last 15 years, Telecom has generated an average return of 4.0%, but for the last 5 years the average has slipped to 0.7% 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 $27.25 and stop loss of $24.53. If above average gains materialize, take profits at the auto sell of $35.43. Top 5 holdings are: Verizon, AT&T, Motorola, T-Mobile and Cisco Systems. Aggressive competition has not been kind to growth, but IYZ does boast a 12-month trailing yield of 1.83%. In the near-term, 5G rollout is likely to be costly, but in the longer-term 5G could replace traditional “wired” high-speed internet connections.

 

 

Semiconductors come into favor near October’s end and remain so until the beginning of December. This trade has averaged 8.6% and 9.1% 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 $191.55 and utilize a stop loss of $172.40. Take profits at the auto sell of $260.03. Top 5 holdings are: Intel, Texas Instruments NVidia, Broadcom and QUALCOMM. These are the companies that design and supply the brains for the bulk 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 14.1% and Staples 8.7%. SPDR Consumer Discretionary (XLY) and SPDR Consumer Staples (XLP) are the preferred vehicles to execute these trades. XLY can be considered on dips below $112.37. An initial stop loss of $101.13 and an auto-sell at $160.27 are suggested. XLY Top 5 holdings are: Amazon.com, Home Depot, McDonald’s, NIKE, and Starbucks. XLP could be purchased on dips below $60.00. Maintain the existing stop loss at $55.46 and use an auto-sell of $71.61. 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 XLP, a new position can be considered. 

 

 

The line between Broker/Dealer and Banking sectors is somewhat blurry with each sector averaging gains of 13.0% and 12.5% 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 $25.65 and a stop loss of $23.09 once a position has been entered. The auto sell is $35.62. 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.

 

 

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 3.3%. 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 below current levels with a buy limit of $86.15. The stop loss is $81.12 and auto sell is $119.71. Top five holdings are: Johnson & Johnson, Merck, UnitedHealth Group, Pfizer and Medtronic. 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 XLV, 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 11.3% over the last 15- year period. Buy SPDR Industrials (XLI) with a buy limit of $71.97. Once purchased, set a stop loss of $64.77 and an auto sell of $100.13. Top 5 holdings are: Boeing, Honeywell, Union Pacific, United Technologies and Lockheed Martin. Despite all the headwinds, trade, slowing growth and in the case of Boeing the 737 Max, the sector has proven resilient. The smallest of positive news or improvement in growth could unleash this sector.

 

 

Materials have a favorable period that runs from the beginning of October through the beginning of May with historical returns of 15.2% over the last 15- year period. Buy SPDR Materials (XLB) with a buy limit of $53.67. Once purchased, set a stop loss of $48.30 and an auto sell of $77.28. Top 5 holdings are: Linde, Du Pont, Ecolab, Air Products & Chemicals and Sherman-Williams. Similar to the Industrials sector, Materials have also held up well and could begin to rise at the first sign of improving growth.

 

 

Computer Tech comes into favor in early October and remains so until the beginning of January. This trade has averaged 7.4% and 3.7% 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 $72.22 and employ a stop loss of $65.00. Take profits at the auto sell of $96.96. Top 5 holdings are: Microsoft, Apple, Visa, Mastercard and Intel. Microsoft is the largest current holding, at 19.48% of total assets. 

 

 

Real Estate has seen returns of 10.2% and 4.2% 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 $91.15 and a stop loss of $82.04 once a position has been entered. The auto sell is $125.56. Top 5 holdings are: Vanguard Real Estate II Index fund, American Tower, Crown Castle Intl., Prologis and Equinix.

 

 

 

Defensive positions in the portfolio did weaken in the first half of September as the broad market rallied to recover August declines. As Treasury bond yields rose in September, interest rate sensitive holdings like XLU, GDX, GLD and SLV, declined. GDX was stopped out on September 9 and SLV was stopped out on September 13. At yesterday’s close both were still lower than when stopped out.

 

Recent weakness has helped GLD recover some of its September losses. Continue to Hold GLD. The short position in iShares Transportation (IYT) has also benefited from recent market declines. Continue to hold the IYT short position for now. Should IYT decline to $173.75 or lower, cover the short position.

 

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

 

Last month’s short energy trade using ProShares UltraShort Bloomberg Crude (SCO) came to an abrupt end on September 16 as crude oil spiked higher due to an attack on Saudi oil assets that took approximately 5 million barrels of daily production of the market. Per standard trading guidelines SCO was closed out because it closed below its stop loss. On that day it was unknown how long it would take to recover the lost production and the loss could have easily grown much bigger.