ETF Trades: Volatility Persists, Election Uncertainty Ending Soon By: | November 03, 2022 | Email | Print

Soon it will be Election Day and hopefully not long after we will have the results. Once the outcome is known, it will likely alleviate some of the uncertainty that has been contributing to the market’s volatile trading which could help the market snap out of the current Fed-induced funk. In the following chart the 30 trading days before and 60 trading days after the last 18 midterm-year elections appear (NASDAQ since 1974). Prior to 1969 the market was closed on Election Day so the close on the day before was used. By 60 trading days after the election (approximately three months), DJIA, S&P 500 and NASDAQ were all higher on average from 6.4% to 9.2%.

 

 

Digging deeper into the data, the following table shows S&P 500 performance 1-, 3-, 6- and 12-months after the election. 1- and 3-months after the election S&P 500 was higher 77.8% and 88.9% of the time respectively. By 6-months and 1-year after, S&P 500 was always higher, although gains did slow after 6-months. Years when the President’s party lost its majority in Congress are shaded in gray.

 

 

As we pointed out last week, the Sweet Spot of the 4-year cycle is now. The headwinds that abound this time around are not entirely unlike past midterm years that have historically been mired by bear markets and uncertain economic and political times. Many of the current concerns do appear to be accounted for by the market’s declines coming into Q4. Inflation does remain stubbornly high despite the Fed aggressively raising rates this year. The Fed’s most recent statement may not have been as dovish as some had hoped for, but it did contain language that suggested the time to slow the pace of increases and possibly even pause hikes is closer now than it was six months ago. The market is likely to remain volatile as it awaits more clarity from the Fed and more signs that inflation is easing. Any back and fill periods by the market are likely an opportunity to consider adding to existing long positions or establishing new longs.

 

 

All twelve new ETF trade ideas presented on the first Thursday of October were added to the Sector Rotation portfolio on October 7. All were added using their respective average price on that day. As of yesterday’s close, SPDR Industrials (XLI) was the top performing position, up 8.4%. Not far behind was SPDR Financial (XLF), up 8.2%. Rising interest rates are likely the key driver for financials. Sizable gains from aerospace and defense lifted the broader industrials sector in October. XLI and XLF can still be considered on dips.

 

At the opposite end of the performance spectrum, we find iShares US Technology (IYW) and SPDR Consumer Discretionary (XLY), down 3.7% and 3.3% respectively. Mega-cap tech has had of tough year and its struggles persist while the consumer sector is being weighted down by Amazon’s recent performance. Historically both sectors have been sensitive to interest rates. Continued choppy trading is likely in order as interest rates continue to creep higher. IYW and XLY can be considered at current levels.

 

Other honorable mentions go to SPDR Consumer Staples (XLP), SPDR Healthcare (XLV) and iShares DJ US Telecom (IYZ), all were up around 6% or slightly better at yesterday’s close. XLP and XLV were flat today while IYZ was off 2.19%. Companies held by XLP and XLV are likely to have above average success at passing price increases out to their customers. All three can be considered on dips below their buy limits.

 

iShares NASDAQ Biotech (IBB) was also added to the portfolio on October 7. IBB was added using its average price from that day as it opened the day trading less than the suggested buy limit. IBB also bucked the trend of broad weakness today. IBB can be considered on dips below its buy limit.

 

The short trade in iShares Semiconductors (SOXX) was covered on October 7 for a 17.4% gain excluding any trading costs. On the same day a new long position was established in SOXX. The new long position was then promptly stopped out on October 11 with a 7.2% loss. We will look to re-enter SOXX on dips below $315.00. 

 

Please see the following table for current advice and updated stop losses, auto-sell prices and buy limits.

 

 

 

As of October 19, all three partial positions in bond ETFs have been stopped out of the portfolio. Their poor performance is not surprising, and we noted in early April that the risk to bond ETFs was higher this year. For those reasons we elected partial positions in them and an allocation to cash and/or money market fund. 

 

Results from SPDR DJIA (DIA), SPDR S&P 500 (SPY), Invesco QQQ (QQQ), and iShares Russell 2000 (IWM) are mixed thus far. DIA and IWM are positive while SPY and QQQ are in the red. Patiently accumulating on dips is our preferred approach this year as uncertainty remains elevated. Officially, the strategy does not employ stop losses on these positions. If this risk exceeds one own personal level, a stop loss could be utilized.