ETF Trades & Portfolio Updates: Transports, Industrials & Precious Metals
By: Christopher Mistal
July 02, 2020
July and the second half of the year have started off consistent with historical trends and patterns. The first trading day was mostly positive with S&P 500 and NASDAQ recording gains while today, the last day before the long Independence Day Holiday weekend the market is also enjoying solid gains. A better than expected June jobs report and positive news regarding covid-19 vaccine are among the key factors supporting the market.
However, July has historically been a month of transition with gains early and weakness in the second half. Thus far the market and economic data appears to be shaking off the spike in daily covid-19 cases along with the delays and even backtracking in reopening plans in certain areas of the country. Perhaps the market is correct, and it really doesn’t matter or perhaps the spike just hasn’t reached a level where the market would take notice.
Nonetheless, the market has enjoyed a spectacular rebound and valuations and bullish sentiment are elevated. Combined with covid-19 and election uncertainties, it would appear that conditions are conducive to trigger a pause or even a pullback by the market sometime during the “Worst Months.” 
July Sector Seasonalities
Three new sector seasonalities begin in the month of July. First up is a bearish seasonality in Transports which typically begins in the middle of July and lasts until the middle of October. This seasonality is based upon the Dow Jones Transportation index (DJT). Over the last 5-, 10- and 15-year time periods DJT has declined 2.7%, 1.0% and 3.5% on average during this weak timeframe. Industrials also exhibit similar weakness as the transports sector over nearly the exact same time period.
iShares Transportation (IYT) is a good choice to establish a short position in to take advantage of seasonal weakness in the transport sector. IYT has nearly $600 million in assets, has traded an average of over 250,000 shares per day over the past 20 trading days and has a reasonable 0.42% expense ratio. IYT’s top five holdings include: Norfolk Southern, Union Pacific, FedEx, Kansas City Southern and JB Hunt.
[iShares Transportation (IYT) Daily Bar Chart]
Unlike NASDAQ and tech stocks, IYT continues to struggle to reclaim pre-covid levels. More recently, IYT’s breakout above its 200-day moving average failed to hold and it retreated back to its lower 50-day moving average. Currently, Stochastic, relative strength and MACD indicators are all neutral, but improving as IYT has enjoyed a few days of gains. IYT could be shorted near resistance around $176.81 or a breakdown below $154.46. If shorted, set an initial stop loss at $180.00, this level is just above the intra-day high in early June’s failed breakout.
SPDR Industrials (XLI) will be our choice to establish a short position in to trade seasonal weakness in the industrial sector. XLI has over $9 billion in assets and frequently has over 10 million shares changing hands daily. Its expense ratio of 0.13% is very reasonable. Top five holdings include: Union Pacific, Honeywell, Boeing, Raytheon Tech and 3M.
[SPDR Industrials Daily Bar Chart]
XLI’s chart and technical indicators do not differ much from the chart of IYT. XLI has not recovered to pre-covid levels, also had a failed breakout in early June and currently is trading between its higher 200-day moving average and its lower 50-day moving average. XLI could be shorted near resistance around $74.94 or a breakdown below $66.35. If shorted, set an initial stop loss at $77.00, this level is just above the intra-day high in early June’s failed breakout.
July’s final seasonality is from gold & silver mining stocks. This seasonality is based upon strength in the Philadelphia Gold & Silver index that typically begins in late July and lasts until late December. Over the last five years this trade has not been that successful however, over the last fifteen years the trade has averaged 4.6%. A three-pronged approach to this trade will be taken. In addition to a long position in VanEck Vectors Gold Miners (GDX) positions in SPDR Gold (GLD) and iShares Silver (SLV) are also suggested.
[VanEck Vectors Gold Miners (GDX) Daily Bar Chart]
GDX is currently trading near multi-year highs due to strength in physical gold. In response to covid-19, interest rates have been cut to zero again and massive government spending has/is taking place. Lower rates and ballooning deficits and debt have generally a negative for the U.S. dollar and have the potential to boost inflation. Both are generally viewed as a positive for gold and the stocks that mine it. GDX could be considered near current levels up to a buy limit of $37.05. If purchased an initial stop loss at $32.25 is suggested. Take profits if GDX trades above $42.46.
[SPDR Gold Daily (GLD) Bar Chart]
[iShares Silver (SLV) Daily Bar Chart]
SPDR Gold (GLD) is a current holding in the Sector Rotation ETF Portfolio. Additional purchase and/or new purchases could be considered on dips below a buy limit of $166.50. If purchased, set a stop loss at $155.00.
SLV could be considered near current levels with a buy limit of $16.90. If purchased, set a stop loss at $14.45.
Sector Rotation ETF Portfolio Updates
With the exception of the four trade ideas presented above, the balance of the Sector Rotation Portfolio is on Hold. Defensive positions in XLP, XLU and IBB were established in early May and will likely be held until sometime on or after October 1, 2020; the earliest date that our Seasonal MACD Buy Signal can trigger.
Please see updated portfolio table below for the most recent advice, buy limits and stop losses.
[Almanac Investor Sector Rotation ETF Portfolio July 1, 2020 Closes]
Tactical Seasonal Switching Strategy Updates
In accordance with our June 11 NASDAQ Seasonal MACD Sell signal corresponding positions in iShares Russell 2000 (IWM) and Invesco QQQ (QQQ) were closed out of the portfolio using their respective average prices on June 12. IWM was a bust, down 8.1%. QQQ was once again the bright spot of the portfolio, up 23.5% from October 14, 2019 through June 12 of this year. Although challenging to hold positions during the dramatic March covid-induced market selloff, it certainly worked well with QQQ.
Now that NASDAQ’s Best Eight Months have come to an end, the portfolio is entirely defensive holding only positions in bond ETFs AGG and BND. Cash is also a position that could be held for the rest of the “Worst Months.” AGG and BND can still be considered on dips below their respective buy limits.
[Almanac Investor Tactical Seasonal Switching ETF Portfolio July 1, 2020 Closes]