ETF Portfolio Updates: Omicron Startles Market By: Christopher Mistal | December 02, 2021 | 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 550,000 net new nonfarm jobs. That would be in line with the 534,000 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 sixteen times in the last twenty-one years. DJIA’s record has one more loss. Average gains range from a low of 0.38% by DJIA to a solid 0.77% by Russell 2000. Sizable losses in 2018 do drag down historical average performance, but the overall trend spanning the last twenty-one years remains bullish.

 

 

Key levels for DJIA and Russell 2000 mentioned in last Tuesday’s email Alert were breached during the selloff. S&P 500 and NASDAQ did retreat as well, but the market appears to be trying to find support. Should tomorrow’s jobs report come in anywhere near expectations it could be the needed catalyst to build further on today’s gains.   

 

 

Since the shortened trading day after Thanksgiving when the new Omicron covid variant was first announced the market has been in something off a tailspin. As of yesterday’s close every position in the Sector Rotation portfolio except SPDR Gold (GLD) and SPDR Technology (XLK) has declined. Since the beginning of the pandemic early last year this has essentially been the markets go to move when governments place restrictions on economic activity. Stay-at-home tech positions generally hold up and advance while the rest just seems to get ignored or sold. Then as time passes and the worst-case scenario does not unfold everything begins climbing again. This day-to-day volatility ends up testing the most discipled traders and investors. However, as we have seen time after time recently, market weakness has been relatively short-lived, and losses have generally been quickly reversed. Today’s gains could be the beginning of the latest reversal or at a bare minimum the bottoming process.

 

Prior to Thanksgiving, SPDR Biotech (XBI) was stopped out when it closed below its stop loss of $122.37 on November 22. XBI has been closed out of the portfolio using its average price of $117.50 on the following trading day. We have been long-time fans of the sector and are going to look to get back into XBI near current levels up to a buy limit of $114.90. If purchased a stop at $99.90 is suggested. Biotech’s historically bullish period runs through March and the new Omicron variant has the potential to draw investors back into the sector as it is noticeably less pricy now than it was at the start of this year.

 

iShares Semiconductor (SOXX) traded above its auto-sell price for the first time on November 18 and was sold that day at $533.36 for a 19.8% gain since being added to the portfolio in early October. SOXX appears to be consolidating after October’s surge. If you are still holding SOXX in anticipation off another move higher, as an alternate to outright selling the position, consider a trailing stop. As a reminder, semiconductor historical seasonal strength has come to an end in early December.

 

Historical seasonal strength in telecom also come to and end in December, usually near month end. With this in mind, we will look to close out the position in iShares DJ US Telecom (IYZ). Aside from its dividend, IYZ has not been all that rewarding. Sell IYZ. For tracking purposes IYZ will be closed out using its average price on December 3.

 

Energy is another sector that has been hit by Omicron. Last month’s new trade idea in the sector, SPDR Energy (XLE) was added to the portfolio using its average price of $58.15 on November 5. XLE can be considered near current levels up to its buy limit. History suggests that freshly added travel restrictions will likely not last and crude oil demand will remain firm while supply is still restrained. A quick crude oil recovery is likely which should be bullish for the companies held in XLE.

 

Perhaps this pullback is different, but that could be said about them all. In all likelihood we will see something similar to the recent past, a dip and a relatively quick recovery. Most recently, September’s losses were quickly recovered in October. Even the bear market that came with the beginning of the pandemic was quickly reversed. For those that can tolerate the volatility, every position in the Sector Rotation portfolio, except GLD, can still be considered at or near current levels. Please see following table for suggested buy limits, stop losses and auto-sell prices (where applicable).

 

 

 

Overall gains in the Tactical Seasonal Switching portfolio have retreated since last update but remain positive. Invescos QQQ (QQQ) is still the best performing position, up 7.3% as of yesterday’s close. SPDR S&P 500 (SPY) was up 3.0% while SPDR DJIA (DIA) and iShares Russell 2000 (IWM) bore the bulk of the sell off, down 1.9% and 3.9% respectively.

 

In spite of the recent weakness, our overall outlook remains bullish for the Best Months. The announcement of Omicron seems more like a reminder that the pandemic and its associated volatility are not over yet. Even before the Black Friday market selloff, covid cases had been on the rise as the market was climbing higher.

 

Anticipated early December tax-loss related selling may not manifest or maybe be muted and limited to underperforming slices of the market this year as the market has already endured a modest pullback. Consistent with Sector Rotation portfolio suggestions, all positions in the Tactical Switching portfolio can also be considered at or near current levels up to their respective buy limits.

 

As a reminder, these positions are intended to be held until we issue corresponding Seasonal MACD Sell Signals next year after April 1 for DJIA and S&P 500 and after June 1 for NASDAQ and Russell 2000. As a result, no stop loss is suggested on these positions.