ETF Trades: Limited Buying on Dips as Headwinds Build By: Christopher Mistal | August 05, 2021 | Email | Print

July’s employment situation report, normally released on the first Friday of August, has largely been a market disappointment over the last twenty 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 NASDAQ declining the most on average, off 0.50%. Strength in five of the last nine years has improved average performance as the prior eleven-year stretch was nearly all bearish.

 

 

Yesterday’s ADP private sector employment report showed 330k jobs were added in July. This was barely more than half of the 653k that had been estimated by Dow Jones. ADP also revised its June total modestly lower than initially reported. Although the ADP report has varied widely at times from the official BLS (Bureau of Labor Statistics) release, it has been tracking rather closely this year. This would seem to suggest a miss is in the cards for tomorrow’s report. Expectations for the BLS report are for another 845k net job gains.

 

As we noted recently, the labor market does appear to be softening or at least plateauing at a level above pre-pandemic numbers. This would also be consistent with recently reported softer than expected economic growth represented by Q2 initial GDP falling short of estimates last week. Thus far the market has largely shrugged off this weaker data in favor of much better-than-expected corporate earnings. But underneath the strength in major indexes, breadth remains an issue along with the lack of new weekly highs.

 

A softening of fundamental data, tepid market breadth and a surge in Covid-19 cases due to the Delta variant are potentially major headwinds to the market. Add in bearish seasonal factors and elevated valuations in some areas of the market and current conditions appear favorable for a market pause at a bare minimum with the possibility of a pullback or correction also being somewhat elevated in the near-term. Caution remains the prudent course of action at least until some of these concerns abate.

 

 

Although two new bullish sector trades begin in August, we will be sticking with a cautious approach. Both new long trade ideas are suggested on dips. This is consistent with our near-term view that the market is primed for some weakness, but it is likely to be mild and we still anticipate new all-time highs later this year, most likely in the historically bullish fourth quarter.

 

Biotechnology sector enters its historical favorable season in August. SPDR S&P Biotech (XBI) could be considered on dips below a buy limit of $120.00. An initial stop at $108.00 is suggested. The auto sell is $151.40 based upon historical average performance. A 14.7% average gain has occurred over the last 15 years while an average gain of 4.2% has taken place the most recent 5 years. Top five holdings are: Moderna, Translate Bio, Intellia Therapeutics, Cytokinetics, and Celldex Therapeutics. In addition to XBI, IBB could also be considered on dips below $162.50.

 

 

Over the last 15 years, High-Tech has generated an average return of 9.5%, and for the last five years the average has also been 9.5% during its bullish season from mid-August to mid-January. Our top ETF within this sector is iShares DJ US Tech (IYW). Set a buy limit of $100.00 and an initial stop loss of $90.00 if purchased. Should high-tech produce above average gains, profits will be taken at the auto sell of $120.45. IYW’s top five holdings are: Apple, Microsoft, Alphabet Class A & C shares and Nvidia. These five holdings represent 50.19% of IYW’s total holdings. Tech has been an unstoppable freight train of growth and performance, that trend is likely to continue, but there could be a pause or pullback before the next leg higher.

 

 

Sector Rotation ETF Portfolio Updates

 

The summer doldrums and the worst two-month span (August-September) of the year have arrived. Thus far it doesn’t really look or feel like it with the market slowly climbing higher lead by new all-time S&P 500 and NASDAQ closing highs today. However, for reasons previously mentioned above, we will stick with our strategy. As such the Sector Rotation portfolio is well positioned for the summer doldrums with exposure to defensive sectors and precious metals. Positions in SPDR Gold (GLD), SPDR Consumer Staples (XLP), iShares NASDAQ Biotech (IBB), iShares Silver (SLV), SPDR Healthcare (XLV) and SPDR Utilities (XLU) are on Hold. 

 

Of this defensive group only SLV has been a disappointment. SLV was briefly a profitable position as recently as early June but has faded more recently. Historically, August has been a favorable month for gold and strength in gold has frequently translated into strength in silver. In anticipation of this strength, SLV can be considered at its current price up to a buy limit of $23.60. For tracking purposes, we will add to the existing SLV position using its average price on August 6. 

 

Last month’s trade ideas shorting the transport and industrial sectors have been added to the portfolio. iShares Transportation (IYT) was shorted on July 8 when it traded below $255.00. SPDR Industrials (XLI) was shorted the following day when it traded above $103.50. As of today’s close, both positions are modestly positive and on Hold.

 

VanEck Vectors Gold Miners (GDX) has also been added to the portfolio. Similar to gold, GDX has just been bouncing around for the last month but it too could benefit if typical historical strength in gold does present this month. GDX is on Hold.

 

As a result of our NASDAQ Seasonal MACD Sell Alert issued on July 14, SPDR Consumer Discretionary (XLY) was closed out of the portfolio the following day using its average price. iShares DJ US Tech (IYW) was also to be sold when NASDAQ’s MACD Seasonal Sell triggered however, it was previously closed out when it traded above its Auto-Sell price of $101.39 on July 6.

 

Please see table below for current advice, updated buy limits and stop losses.

 

 

 

Per our NASDAQ Seasonal MACD Sell Alert, Invescos QQQ (QQQ) was closed out on July 15 using its average price of $360.83 for a total “Best Months” gain of 23.3%. With the sale of QQQ, the Tactical Seasonal Switching Strategy is now in a fully defensive position for the balance of the “Worst Months.”

 

AGG and BND are positive with gains of 1.7% each as of yesterday’s close. AGG and BND are on Hold. Please note, stop losses have been added and are currently just below their respective average purchase prices. The objective of these positions is to preserve capital while offering a modest dividend.