ETF Trades: October Seasonal Sector ETF Long Basket By: Christopher Mistal | October 06, 2022 | Email | Print

Each year while preparing the annual Almanac, we revisit and re-analyze our sector seasonalities (STA 2022 pages 94, 96 and 98) in depth in order to adjust 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 soon-to-be available 2023 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 25-year time periods is included. We prefer to focus on the 25-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 plus an additional percentage) 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 (the suggested maximum to pay for a share) are near current market levels as the market appears to be consolidating early October gains that triggered our Seasonal MACD Buy signal on Tuesday. Market volatility, measured by VIX, remains elevated. This has been taken into consideration when determining the suggested stop losses in an effort to avoid being whipsawed out of a position.

 

 

Transports enter their historically favorable season at the beginning of October and it runs until May. iShares DJ Transports (IYT) is attractive near current levels with a buy limit of $210.68. The suggested stop loss is $183.82 and auto sell is $272.54. Top 5 holdings are: Union Pacific, United Parcel Service, CSX, Old Dominion Freight, and Uber. 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 25 years, Telecom has generated an average return of 7.6% 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 $22.31 and stop loss of $19.47. If above average gains materialize, take profits at the auto sell of $28.81. Top 5 holdings are: Cisco Systems, Verizon, Comcast, AT&T, and T-Mobile. Aggressive competition and slowing growth has hindered the sector, but IYZ does boast a 12-month trailing yield of 2.78% as of August 31.

 

 

Semiconductors come into favor near October’s end and remain so until the beginning of December. This trade has averaged 14.5% and 13.7% gains over the last 25- and 5-year periods, respectively. iShares Semiconductor (SOXX) is the top selection. Establish new positions with a buy limit of $351.52 and utilize a stop loss of $306.70. Take profits at the auto sell of $482.99. Top 5 holdings are: Texas Instruments, Broadcom, Nvidia, Qualcomm, and Advanced Micro Devices. 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. Persistent shortages of some semiconductors have only reinforced how important and significant the sector has become. Prior to going long, the short position in SOXX will be covered (see below in Updates).

 

 

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 25-years Discretionary has an average gain of 16.5% and Staples 9.6%. SPDR Consumer Discretionary (XLY) and SPDR Consumer Staples (XLP) are the preferred vehicles to execute these trades. XLY can be considered below $148.17. An initial stop loss of $129.28 and an auto-sell at $207.14 are suggested. XLY Top 5 holdings are: Amazon.com, Tesla, Home Depot, McDonald’s, and Lowe’s Companies. XLP could be purchased below $69.20. Our suggested stop loss is $60.37 and use an auto-sell of $91.01. XLP Top 5 holdings are: Procter & Gamble, Pepsi, Coca-Cola, Costco Wholesale, and Walmart.

 

 

The line between Broker/Dealer and Banking sectors is somewhat blurry with each sector averaging gains of 15.7% 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 $32.41 and a stop loss of $28.28 once a position has been entered. The auto sell is $45.00. 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 Charles Schwab. As long as the jobs market remains reasonably firm, profits for these two sectors are likely to hold up.

 

 

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 7.1%. 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 around current levels with a buy limit of $128.16. The stop loss is $111.82, and the auto sell is $169.94. Top five holdings are: UnitedHealth Group, Johnson & Johnson, Eli Lilly, AbbVie, and Pfizer.

 

 

Industrials have a favorable period that runs from the end of October through the middle of May with historical returns averaging 12.7% over the last 25-year period. Buy SPDR Industrials (XLI) with a buy limit of $88.71. Once purchased, set a stop loss of $77.40 and an auto sell of $119.97. Top 5 holdings are: Raytheon Technologies, Union Pacific, United Parcel Service, Honeywell, and Boeing.

 

 

Materials have a favorable period that runs from the beginning of October through the beginning of May with historical returns of 15.7% over the last 25-year period. Buy SPDR Materials (XLB) with a buy limit of $72.70. Once purchased, set a stop loss of $63.43 and an auto sell of $100.94. Top 5 holdings are: Linde, Air Products & Chemicals, Sherman-Williams, Corteva, and Freeport-McMoRan.

 

 

Computer Tech comes into favor in early October and remains so until the beginning of January. This trade has averaged 14.1% and 11.1% gains over the last 25- and 5-year periods, respectively. SPDR Technology (XLK) is the top selection. Enter this trade with a buy limit of $128.16 and employ a stop loss of $111.91. Take profits at the auto sell of $175.61. Top 5 holdings are: Apple, Microsoft, NVIDIA, Visa, and Mastercard. Apple and Microsoft combined account for 45.79% of total assets as of the October 5 close. 

 

 

Real Estate has seen returns of 10.9% over the last 25 years from the end of October to the beginning of May. Vanguard REIT (VNQ) is our choice. Use a buy limit of $82.44 and a stop loss of $71.93 once a position has been entered. The auto sell is $109.71. Top 5 holdings are: Vanguard Real Estate II Index fund, American Tower, Prologis, Crown Castle International, and Equinix.

 

 

 

During September’s slump, SPDR Biotech (XBI) dipped below its buy limit and additional shares were added to the existing position on September 22. XBI’s purchase price has been adjusted for the additional shares added at a lower price. As a reminder, XBI is a long-term holding. XBI can still be considered on dips below its buy limit.

 

iShares NASDAQ Biotech (IBB) did not trade below its suggested buy limit since last update. As a result of our Seasonal MACD Buy Signal on October 4, IBB’s suggested buy limit, stop loss and auto-sell have been adjusted. IBB can be considered at current levels up to its new buy limit of $123.00.

 

Broad weakness in September pushed iShares US Technology (IYW) below its stop loss on September 23. With the arrival of the Sweet Spot of the four-year cycle, a new position in IYW can be considered near current price up to a buy limit of $79.34. If purchased, the suggested stop loss is $69.22, and the auto-sell price is $106.53.

 

Seasonal weakness in Semiconductors has historically ended in October. Cover the short trade in SOXX. For tracking purposes, SOXX will be covered using its average price on October 7.

 

Seasonal weakness in oil appears to have been brief this year, but it did arrive. ProShares UltraShort Bloomberg Crude (SCO) was added to the portfolio on September 14, when it traded below $24. Twelve days later SCO traded above its auto-sell price of $30.82 and was sold for a 28.4% gain.

 

 

 

Per Tuesday’s Seasonal MACD Buy Alert, new positions in SPDR DJIA (DIA), SPDR S&P 500 (SPY), Invesco QQQ (QQQ), and iShares Russell 2000 (IWM) have been added to the portfolio using their respective average daily prices on October 5. As of today’s close, these positions are mildly underwater. DIA, SPY, QQQ, and IWM can all be considered up to their buy limits.

 

Partial positions in bond ETFs, TLT, AGG and BND are on hold. There poor performance this year is not unexpected as the Fed has been increasing rates and bond prices generally decline as rates go higher. In anticipation of poor bond ETF performance during this year’s “Worst Months,” we limited the portfolio to partial positions and suggested a preference for cash. Suggested stop losses for TLT, AGG, and BND appear in the table below.