ETF Trades & Portfolio Updates: Hi-Tech & Utilities on Deck By: Christopher Mistal | February 03, 2022 | Email | Print

February has historically been a rather bland month. Since 1950, S&P 500 has averaged a measly 0.001% gain. Over the more recent 21-year period S&P 500 average performance has declined to a loss of 0.4% in February. February’s first trading day has historically been good, and it was earlier this week, while trading days four, six, nine, ten and eleven have been consistently bullish over the last 21 years with each advancing at least thirteen times. Outside of these six days, the balance of February has been somewhat disappointing for bulls. Weakness after mid-month is most notable with every index giving back all of their respective gains by month’s end.

 

 

 

Featured in the Stock Trader’s Almanac 2022, on page 94, Sector Seasonality, there are two sectors that begin their seasonally favorable periods in March: High-Tech and Utilities. This year we are going to look to take advantage of any seasonal weakness in February to establish new positions associated with these sectors.

 

In the following weekly bar chart of the Utility Sector Index (UTY), seasonal strength (lower pane, shaded in yellow) typically begins following an early or mid-March bottom and usually lasts through early October although the bulk of the move is typically done sometime in late May or early June (blue arrow). Last year’s volatile trading has impacted the seasonal pattern in the lower pane of the chart. Typically the pattern is less choppy as the sector does not usually experience major price swings in a year. Utilities tend to be a defensive sector of the market and historically have seen gains during the “Worst Six Months,” May through October.

 

 

With over $13 billion in assets and ample average daily trading volume, SPDR Utilities (XLU) is a top choice to consider holding during Utilities’ seasonally favorable period. It has a gross expense ratio of just 0.10% and a relatively attractive yield of 2.93%. Top five holdings include: NextEra Energy, Duke Energy, Southern Co, Dominion Resources and American Electric Power Company.

 

XLU could be considered near current levels up to a buy limit of $69.90. This is right around its projected monthly pivot point (blue-dashed line in daily bar chart below). After declining for nearly the entire month of January, technical indicators applied to XLU all began to improve in late January and appear to be continuing that trend into February. Based upon its 15-year average return of 8.3% (excluding dividends and trading fees) during its favorable period mid-March to the beginning of October, set an auto-sell price at $83.27. If purchased an initial stop loss of $62.91 is suggested. For tracking purposes, XLU will be added to the Sector Rotation ETF portfolio using its average price on February 4.

 

 

Our favorite ETF to trade High-Tech’s seasonal strength from mid-March through the beginning of July is iShares DJ US Tech (IYW). Our existing position was stopped out on January 25. Any February weakness could be an opportunity to consider establishing a new position. IYW can be considered on dips below $98.25. If purchased an initial stop loss at $88.43 is suggested and should above average gains materialize take profits at the auto-sell price of $119.86. For tracking purposes, we will add to the existing position if IYW dips below the buy limit. Mega-cap tech earnings have been either complete blowouts, like Google or complete blowups, such as Meta Platforms (Facebook). With this in mind, we will hold remaining tech-related positions, but limit new purchases as the outlook is becoming increasingly murky. 

 

 

 

January’s across-the-board weakness was felt across the portfolio. One exception was SPDR Energy (XLE) as crude oil continued to advance and natural gases prices firmed. At yesterday’s close XLE was up 17.8%, good for second best in the portfolio after SPDR Gold (GLD). XLE did retreat modestly today as crude oil broke above $90. It appears as though there is little standing in the way of crude and the $100 threshold. Continue to Hold XLE.

 

GLD is also on Hold. It has held up well considering the relatively rapid shift in Fed policy that is bringing QE to an accelerated end and promising to raise rates in an effort to curtail surging inflation. For nearly a year gold has been trading sideways, but each retreat has been ending at a higher low. This pattern could be setting gold and GLD up for a new and perhaps meaningful upside move.

 

Tech was a loser in January even after a nice late-month surge recovered some of the declines. As a result of the declines, previously mentioned IYW was stopped out along with SPDR Technology (XLK) and SPDR Consumer Discretionary (XLY). Given the choppy nature of tech earnings thus far we are going to let XLK go, and we are also going to pass on XLY due to having nearly 40% of its holdings in Amazon and Tesla.

 

Last month’s new trade idea, First Trust Natural Gas (FCG), was added to the portfolio on January 14. With natural gas prices finding firmer ground, FCG was up a modest 3.2% at yesterday’s close. Today FCG did take a hit, but its decline was less than the broad indexes even as natural gas had a tough day.

 

SPDR S&P Biotech (XBI) is the worst performing position in the portfolio, and it was down more today. Per last update, additionally shares were added to the existing position and the original entry price has been adjusted for the new shares at a lower price. XBI is intended to be a long-term core holding in the portfolio. XBI is on Hold. 

 

With the exception of the new trade ideas, all other positions in the portfolio are currently on Hold.

 

 

 

As of yesterday’s close, the Tactical Seasonal Switching Strategy portfolio had an average loss of 0.01% since our Seasonal Buy Signal. iShares Russell 2000 (IWM), is the worst performing position in the basket, down 9.3%. SPDR S&P 500 (SPY) was best, up 4.6%. As of today’s close Invesco QQQ (QQQ) is also in the red. All positions in the portfolio are on Hold.

 

Positions in the Tactical Switching Strategy portfolio are intended to be held until we issue corresponding Seasonal MACD Sell Signals after April 1 for DJIA and S&P 500 and after June 1 for NASDAQ and Russell 2000. Due to this no stop loss is suggested on these positions and ample time remains for the market and these positions to improve.