ETF Trades: Shorting Setups in Transports & Industrials
By: Christopher Mistal
July 07, 2022
On the heels of one of the roughest first-half starts in decades; the market has found some footing during the seasonally bullish start to the second half of the year here in the beginning of July. NASDAQ’s midyear rally appears to be fully underway lending strength to S&P 500 and DJIA. Even during historically meager midterm years, the first half of July has generated respectable gains. 
However, as you can see in the updated S&P 500 seasonal pattern chart, through its July 6 close below, gains have historically faded later in the month or sometime in August. Despite a few days of strength recently, we still expect this bear market to put in a typical midterm-election-year bottom sometime later this year. The bottom is most likely to be in the August-October timeframe just ahead of the midterm elections and possibly around the time when the Fed begins to slow or even pause its rate hike cycle.
[S&P 500 Midterm Seasonal Pattern versus 2022 Chart]
July Sector Seasonalities
Three new sector seasonalities begin in the month of July. First up is a bearish seasonality in Transports which typically begins in the middle of July and lasts until the middle of October. This seasonality is based upon the Dow Jones Transportation index (DJT). Over the last 10- and 15-year time periods DJT has declined 2.1% and 2.6% on average during this weak timeframe. Industrials also exhibit similar weakness as the transports sector over nearly the same period.
iShares Transportation (IYT) is a top choice to establish a short position in to take advantage of seasonal weakness in the transport sector. IYT has over $800 million in assets, has traded an average of over 250,000 shares per day over the past 30 days and has a reasonable 0.41% expense ratio. IYT’s top five holdings include: United Parcel Service, Union Pacific, CSX, FedEx and Old Dominion Freight.
[iShares Transportation (IYT) Daily Bar Chart]
Similar to the broader market, IYT has been trending lower since the start of the year with only the briefest hints of strength along the way. Currently IYT is below its 50- and 200-day moving averages and its 50-day moving average has fallen below its 200-day (a death cross). Currently, stochastic, relative strength and MACD indicators have turned mildly positive, but it could be a false indication similar to what transpired in late May through early June. IYT could be shorted near resistance around $226.25 or a breakdown below $199. If shorted, set an initial stop loss at $236.00, this level is around IYT’s early June closing high.
SPDR Industrials (XLI) will be our choice to establish a short position in to trade seasonal weakness in the industrial sector. XLI has over $12 billion in assets and frequently has over 10 million shares changing hands daily. Its expense ratio of 0.10% is very reasonable. Top five holdings include: Raytheon Tech, United Parcel Services, Union Pacific, Honeywell and Lockheed Martin.
[SPDR Industrials Daily Bar Chart]
XLI’s chart and technical indicators do not differ much from the chart of IYT. XLI even experienced the same late May to early June rally before falling abruptly. XLI could be shorted near resistance just above $92.10 or on a breakdown below $84.00. If shorted, set an initial stop loss at $97.75, this level is just above the closing high in early June’s failed breakout.
July’s final seasonality is for gold & silver mining stocks. This seasonality is based upon strength in the Philadelphia Gold & Silver index that typically begins in late July and lasts until late December. The recent break in gold and silver along with continued strength in the U.S. dollar suggests further weakness is likely before the ultimate bottom is reached. Gold’s failure to make a meaningful run higher while inflation is at multi-decade highs is also concerning. For now, we are going to pass on this trade as the current situation does not appear favorable. 
Sector Rotation ETF Portfolio Updates
In the time since last update all positions in the portfolio except SPDR S&P Biotech (XBI) were stopped out. Even historically defensive positions that have traditionally weathered the “Worst Six Months” were not spared by the broad declines in June. SDPR Healthcare (XLV) was the first to get stopped out on June 10. SPDR Consumer Staples (XLP) followed on June 13 and SPDR Utilities (XLU) on June 16. Excluding dividends and trading costs, only XLV produced a modest gain.
Previously mentioned U.S. dollar strength appears to be a key contributor to gold’s recent weakness with SPDR Gold (GLD) being stopped out at the start of this week. GLD had been a longer-term holding so even after its recent retreat it still produced a 19.9% gain since addition.
June’s broad market weakness was an excellent reminder that at times, cash can be the safest place to shelter. As has been the case throughout the market’s long history, there will likely be a much better opportunity to put cash back to work. Until that time arrives, interest rates are on the rise while inflation (year-over-year change) appears to be topping. Cash may not provide much of a real return, but it surely does appear less risky than other choices at this time.
[Almanac Investor Sector Rotation ETF Portfolio July 6, 2022 Closes]
Tactical Seasonal Switching ETF Portfolio Updates
On June 13, NASDAQ’s Seasonal MACD Sell signal was triggered. Per the email Alert sent that day Invesco QQQ (QQQ) and iShares Russell 2000 (IWM) were closed out of the portfolio using their respective average prices during the June 14 trading session. NASDAQ just recorded its first down “Best Eight Months” with MACD timing since 2008 and its first double-digit decline since 2001. These are disappointing results for the strategy, but we do not believe it is broken or no longer working. We anticipate there will be a better opportunity later this year with history suggesting a solid, positive return during the next “Best Months” period which also aligns perfectly with the “Sweet Spot” of the four-year cycle.
Defensive bond positions, TLT, AGG and BND, have recovered modestly as recession fears have supported demand, but remain in the red excluding dividends and trading costs. All three positions are considered partial positions as originally suggested in April. Should more recession signals flash, bond funds could easily continue to rally. Any price upside could be limited as the Fed is still committed to raising rates. Once again, cash does appear to be the least risky position to remain in during the remainder of the “Worst Months” this year.
[Almanac Investor Tactical Seasonal Switching ETF Portfolio July 6, 2022 Closes]