ETF Trades: Seasonal Sector ETF Long Basket By: Christopher Mistal | October 07, 2021 | Email | Print

Every year while preparing the annual Almanac, we revisit and analyze our sector seasonalities (STA 2021 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 2022 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. If Octoberphobia returns and the market struggles 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 $247.55. The stop loss is $222.80 and auto sell is $311.52. Top 5 holdings are: Union Pacific, United Parcel Service, CSX, Uber and Southwest Airlines. With nearly 70% of U.S GDP coming from consumers, seasonal strength in the consumer sector overlaps nicely with the transportation sector.

 

 

Over the last 15 years, Telecom has generated an average return of 2.7% during its bullish seasonality from the middle of October through around yearend. The top ETF within this sector is iShares DJ US Telecom (IYZ). Use a buy limit of $32.85 and stop loss of $29.57. If above average gains materialize, take profits at the auto sell of $37.11. Top 5 holdings are: Comcast, Cisco Systems, Verizon, AT&T and Charter Communications. Aggressive competition has hindered the sector, but IYZ does boast a 12-month trailing yield of 2.46% as of August 31.

 

 

Semiconductors come into favor near October’s end and remain so until the beginning of December. This trade has averaged 8.9% and 12.0% gains over the last 15- and 5-year periods, respectively. iShares Semiconductor (SOXX) is the top selection. Establish new positions with a buy limit of $445.25 and utilize a stop loss of $400.73. Take profits at the auto sell of $533.36. Top 5 holdings are: Intel, Broadcom, Nvidia, Texas Instruments 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, cameras, drones, refrigerators, air conditioners basically you name it. Recent shortages of semiconductors has only reinforced how important and significant the sector has become.

 

 

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 7.9%. SPDR Consumer Discretionary (XLY) and SPDR Consumer Staples (XLP) are the preferred vehicles to execute these trades. XLY can be considered on dips below $180.50. An initial stop loss of $162.45 and an auto-sell at $226.55 are suggested. XLY Top 5 holdings are: Amazon.com, Tesla, Home Depot, McDonald’s and NIKE. XLP could be purchased on dips below $69.50. Update the existing stop loss to $62.55 and use an auto-sell of $82.49. XLP Top 5 holdings are: Procter & Gamble, Pepsi, Coca-Cola, Walmart and Mondelez. 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 on dips below the buy limit. 

 

 

The line between Broker/Dealer and Banking sectors is somewhat blurry with each sector averaging gains of 21.2% and 19.3% over the last 5 years, respectively. Instead of trading two smaller, somewhat less liquid ETFs, SPDR Financial (XLF) appears to be the better choice. Use a buy limit of $38.10 and a stop loss of $34.29 once a position has been entered. The auto sell is $47.27. 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 7.7% average return over the past five years while Pharmaceutical alone has been just 4.8%. 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 $124.90. The stop loss is $112.41 and auto sell is $150.99. Top five holdings are: Johnson & Johnson, UnitedHealth Group, Pfizer, Thermo Fisher Scientific and Abbott Laboratories.

 

 

Industrials have a favorable period that runs from the end of October through the middle of May with historical returns averaging 11.0% over the last 15-year period. Buy SPDR Industrials (XLI) with a buy limit of $99.60. Once purchased, set a stop loss of $89.64 and an auto sell of $121.61. Top 5 holdings are: Honeywell, Union Pacific, Raytheon Technologies, United Parcel Service, and Boeing.

 

 

Materials have a favorable period that runs from the beginning of October through the beginning of May with historical returns of 14.3% over the last 15-year period. Buy SPDR Materials (XLB) with a buy limit of $80.05. Once purchased, set a stop loss of $72.05 and an auto sell of $100.65. Top 5 holdings are: Linde, Sherman-Williams, Air Products & Chemicals, Ecolab and Freeport-McMoRan.

 

 

Computer Tech comes into favor in early October and remains so until the beginning of January. This trade has averaged 8.2% and 8.2% 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 $150.15 and employ a stop loss of $135.14. Take profits at the auto sell of $178.71. Top 5 holdings are: Apple, Microsoft, NVIDIA, Visa and PayPal. Apple and Microsoft combined account for 43.31% of total assets as of October 6 close. 

 

 

Real Estate has seen returns of 9.0% over the last 15 years from the end of October to the beginning of May. Vanguard REIT (VNQ) is our choice. Use a buy limit of $101.75 and a stop loss of $91.58 once a position has been entered. The auto sell is $122.00. Top 5 holdings are: Vanguard Real Estate II Index fund, American Tower, Prologis, Crown Castle Intl and Equinix.

 

 

 

September’s market slump did ding some positions in the portfolio. iShares NASDAQ Biotech (IBB) was stopped out on October 4 as the market retested its recent lows. SPDR S&P Biotech (XBI) also retreated but remained above its stop loss. Since Biotech’s favorable season lasts until next March, XBI and be considered on dips below $120.00. Adjust XBI’s stop loss to $108.00.

 

Demand for crude oil apparently has caught suppliers off-guard and as a result price has been climbing higher. ProShares UltraShort Bloomberg Crude (SCO) was added to the portfolio on September 13 and then stopped out on September 27. With crude displaying strength in its typically seasonally weak period we will move on.

 

With the end of the Worst Months, May through October, approaching we are going to close out a few trades. SPDR Utilities (XLU) can be sold. Short trades in iShares Transportation (IYT) and SPDR Industrials (XLI) can be covered/closed out. For tracking purposes these three trades will be closed out of the portfolio using their respective average prices on October 8.