ETF Trades & Updates: Energy in Season and Still Time to Accumulate By: Christopher Mistal | December 05, 2019 | 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 178,000 net new nonfarm jobs. This would be much better than the 67,000 that ADP reported yesterday. 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 nineteen years. DJIA’s record has one more loss. Average gains range from a low of 0.31% by DJIA to 0.66% by Russell 2000. Last year’s rout does drag down historical average performance, but the overall trend spanning the last nineteen years remains bullish.

 

 

 

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 11.1%, 6.2%, and 8.9% gains over the last 15-, 10-, and 5-year periods. This seasonality is not based upon the commodity itself (crude oil or natural gas); 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 under pressure since late-April and natural gas has been languishing even longer. Slowing growth, domestic and globally, along with improvements in energy efficiency and production have kept prices for energy in check. The end of the driving season in September also contributed to declines and the anticipation of the start of the next driving season in May is what is likely to trigger a rally in the sector soon. Given current fundamentals the rally could be below average, but if the outlook for trade and growth does improve between now and then, oil & gas related shares could enjoy an above average rally.

 

 

SPDR Energy (XLE) is the top pick to trade this seasonality. A new position in XLE could be established near current levels up to a buy limit of $59.25. Employ a stop loss of $53.33. Take profits at the auto sell of $82.28. Exxon Mobil is the top holding in XLE at 22.46%. The remaining top five holdings of XLE are Chevron, Phillips 66, ConocoPhillips and Schlumberger.

 

 

 

Even though the market has weakened modestly to start off December, the Sector Rotation ETF Portfolio has held up. Vanguard REIT (VNQ) is the sole losing position, down a modest 0.4% since mid-October. iShares NASDAQ Biotech (IBB) is at the other end of the performance spectrum, up 19.5% since mid-October. Overall the entire portfolio is up an average of 6.1%.

 

With the exception of SPDR Gold (GLD) and iShares DJ US Telecom (IYZ), all other positions can still be considered on dips or at current levels up to their respective buy limits. There is ample time remaining of the Best Months and individual sector seasonalities for these positions to rise further. GLD and IYZ are on Hold as their corresponding sector seasonalities comes to an end in December. Semiconductor strength has also traditionally ended in December, but more recently strength has been lasting longer. Please see table for updated buy limits and stop losses.

 

 

 

Our overall outlook remains bullish for the Best Months. Thus far, despite the occasional setback, this has been the correct view as the average gain in the Tactical Seasonal Switching portfolio is 5.5% since we issued our Seasonal Buy Signal. iShares Russell 2000 (IWM) is still the best performing position, up 7.5%. The laggard so far is SPDR DJIA (DIA) as ongoing trade concerns appear to have the greatest impact on the 30 stocks that comprise the DJIA.

 

Historically the first half of December has experienced some weakness, but typically around mid-month, or shortly thereafter, the rally has resumed. Any weakness this December could be used to add to existing positions or to establish new positions. All positions in the portfolio can be considered on dips below their respective buy limits. 

 

Please note, these positions are intended to be held until we issue corresponding Seasonal MACD Sell Signals next year after April 1. As a result, no stop loss is suggested on these positions.