ETF Trades & Portfolio Updates: Taking Energy Sector Profits
By: Christopher Mistal
March 03, 2022
It has been a little more than a week since Russia invaded Ukraine. The invasion removed one uncertainty (why is Russia amassing forces along the border) and introduced countless more for the market to sort through. Market volatility has remained elevated, but thus far it has not spiked to the levels last seen at the beginning of the pandemic. Ukraine has successfully resisted Russia forces thus far and the international community has come together in a limited capacity to hit Russia and its supporters with sanctions. What ultimately unfolds in Ukraine is still an unknown, but it is increasingly clear that Russia’s current leadership is going to forever be shunned by the majority of nations regardless of the war’s outcome. The human toll and economic impacts are likely to be long-lasting as well.
Last week we presented a table of past Geopolitical & Energy Crises in an effort to provide some context for current events. Some observations that can be made from that table is the market always finds a way to work itself higher, but the exact timely largely depends on the duration of the crises and any long-lasting effects. Timing of the crisis also appears to play a role in the market’s response as crisis during a relatively healthy domestic economy such as the Cuban Missile Crisis had only a minimal impact on the intermediate- and longer-term trajectory of the market while the Arab Oil Embargo only worsened an already tough economic situation. The current Ukraine crisis arrived when the U.S. economy and market was relatively healthy so it is reasonable to expect, provided the situation doesn’t considerably escalate, that current volatility will eventually recede and the market will get back to doing what it has historically done, climb higher.
Since this year is a midterm year, it would not be completely without historical precedent for the market to remain volatile throughout the balance of the first quarter into Q2-Q3 before finally finding firmer footing. The midterm bottom could also arrive early this year. Continue to heed stops, remain focused on your strategy, and be prepared to put any cash back to work.
New Sector Seasonality
There is one new sector seasonality that begins in April: Computer Tech. We are going to look to take advantage of current weakness this month to establish a new position associated with this sector. In the following weekly bar chart of the Computer Technology (XCI), seasonal strength (lower pane, shaded in yellow) typically begins following an early or mid-April bottom and usually lasts through around mid-July although the bulk of the move can occur early. Market volatility over the past two years has influenced the seasonal pattern, but in the upper pane there was a clear move higher by XCI off of its March lows last year.
[Computer Technology Index (XCI) Weekly Bars and Seasonal Trend Chart]
With over $45 billion in assets and ample average daily trading volume, SPDR Technology (XLK) is a top choice to consider holding during Computer Tech’s seasonally favorable period. It has a gross expense ratio of just 0.10%. Top five holdings include: Apple, Microsoft, NVDIA, VISA and Mastercard. Please note, Apple and Microsoft combined account for 46.39% of XLK’s holdings as of March 2 close.
XLK could be considered on dips with a buy limit of $152.85. This is right around its projected monthly pivot point (blue-dashed line in daily bar chart below). After declining for two months, technical indicators applied to XLK are beginning to improve. MACD has turned positive while Relative Strength and Stochastic indicators are also improving. Based upon its 15-year average return of 8.1% (excluding dividends and trading fees) during its favorable period mid-April to the middle of July, set an auto-sell price at $181.75. If purchased an initial stop loss of $137.57 is suggested. For tracking purposes, XLK will be added to the Sector Rotation ETF portfolio if it trades below its buy limit.
[SPDR Technology (XLK) Daily Bar Chart]
Sector Rotation ETF Portfolio Update
February certainly lived up to its historical reputation this year as a weak link in the Best Months as widespread market weakness persisted throughout the month. Market-wide weakness did translate into declines for many positions in the Sector Rotation portfolio. Once again, two notable exceptions were SPDR Gold (GLD) and SPDR Energy (XLE) as both enjoyed solid gains over the last month. GLD was up 32.2% since addition at yesterday’s close. Continue to Hold GLD.
With crude oil breaking above $110 per barrel, XLE traded to and above its associated auto-sell price on March 2. Per standard trading guidelines, XLE was sold at 73.19 and closed out of the portfolio. In response to several member inquiries, instead of outright selling XLE, one could consider implementing a tight trailing stop loss on the position or consider selling a portion of the position at the auto-sell price and holding the remaining with a tight trailing stop loss. Should nations decide to truly ramp up sanctions on Russia and stop buying its crude, prices could easily jump much higher, but on the flip side of this is the fact that a large premium has already been built into to crude’s price and any talk of a ceasefire and negations could just as easily trigger a sizable retreat in crude.
Global X Copper Miners (COPX) and First Trust Natural Gas (FCG) have also had a good month up 17% and 14.4% respectively at yesterday’s close. Natural gas has been rallying in sympathy with crude, although to a lesser extent. Copper has jumped this week possibly in response to falling mortgage rates and persistently strong demand for housing. COPX and FCG are on Hold. Unfortunately, United States Copper (CPER) was stopped out in the first half of February.
SPDR Financial (XLF) was stopped out on March 1 at 37.28. Typically the prospects of higher interest rates and a steepening yield curve have been positive for the banks, but it is increasingly looking like the yield curve is flattening as near-term rates creep higher in anticipation of the Fed while long-term rates are not rising nearly as much. A flattening yield curve has not been a positive for the banking sector. A second risk is sanctions on Russia. Anyone remember BRIC? That “R” was for Russia, and it is likely a safe assumption that there are more Russian assets at Western banks than one may think. The potentially most damaging assets that banks could be holding are bonds issued by Russia corporations or Russia itself.
SPDR Industrials (XLI) was stopped out on February 23. It would appear it just got wrapped up in broad selling at the peak of the Fed rate hike cycle discussion as XLI has since bounced back. During XLI’s recent decline its 50-day moving average has fallen below its 200-day moving average. This crossover is frequently called a “death cross.” With XLI quickly approaching its 50-day moving average we will take a wait-and-see approach. It would not be surprising to see XLI fail to reclaim its 50-day moving average on its first attempt. 
SPDR S&P Biotech (XBI) is still the worst performing position in the portfolio, and it was down more today. As a reminder, XBI is intended to be a long-term core holding in the portfolio. The magnitude of its selloff is starting to gather some attention now that its price has returned to pre-covid levels. XBI is on Hold
Last month’s new trade ideas, iShares DJ US Tech (IYW) and SPDR Utilities (XLU) have been added to the portfolio. As of the market’s close on March 2, IYW was up a modest 2.2% while XLU was down 0.4%. After today’s session, both are positive even though IYW retreated. IYW and XLU are Hold.
With the exception of the new trade ideas, all other positions in the portfolio are currently on Hold.
[Almanac Investor Sector Rotation ETF Portfolio – March 2, 2022 Closes]
Tactical Seasonal Switching Strategy Portfolio Update
As of yesterday’s close, the Tactical Seasonal Switching Strategy portfolio had an average loss of 3.5% since our Seasonal Buy Signal. iShares Russell 2000 (IWM), is the worst performing position in the basket, down 8.0%. However, this is actually an improvement since last month. If IWM can find support and rally, it would be a welcome and encouraging sign. SPDR S&P 500 (SPY) was the last remaining positive position, up 0.1%. 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.
[Almanac Investor Tactical Switching Strategy Portfolio – March 2, 2022 Closes]