ETF Trades: Not So Bad December & Energy Sector on Radar By: Christopher Mistal & Jeffrey A. Hirsch | December 01, 2022 | Email | Print

There was a stat floating around the internet and business news channels this week that stated when the S&P 500 was down 15% or more year-to-date (YTD) on November 30, December was down >2% on average. We ran the numbers yesterday before the big rally on Fed Chair Powell’s “makes sense to moderate the pace of our rate increases” comments yesterday at the Brookings Institute. 

 

What we found was that most of the carnage after November YTD losses > 15% occurred in the Great Depression years and since WWII December has performed much better after a down >15% YTD November. During the Depression after November YTD >15% losses December was down 3 of 4 with an average loss of -5.4%. In the six years since 1939 with November YTD >15% losses December was up 3, down 3 with an average loss of -0.3%.

 

 

But with the big 3.1% gain in the S&P 500 on November 30, the YTD loss receded above the -15% mark to -14.4% on the heels of a 5.4% gain for the month, which is also a 14.1% rally off the October 12 low. And this marks the first back-to-back monthly gains of over 5% each month since August 2020, the ones before that were in March-May 2009. It’s the 14th such occurrence since 1950. The previous 13 all occurred in bull markets.

 

Now, when the S&P 500 is down YTD November less than 15%, December’s performance is not so bad at all, just a tad below the average 1.6% to 1.1%, up 17 of 23 or 74% of the time. We still expect some chop as the bull market finds its footing, but we remain bullish and anticipate the yearend rally to continue to climb the proverbial “wall of worry” and for the Santa Claus Rally to come to town later this month.

 

 

 

Oil companies typically come into favor in mid-December and remain so until late April or early May in the following year (highlighted with yellow box in following chart). This trade has averaged 11.2%, 8.0%, and 6.6% over the last 25-, 10-, and 5-year periods respectively. Sizable declines in 2017 and 2020 have depressed average performance in the most recent periods when compared to the 25-year period. Seasonal strength in crude oil companies has also been ending sooner, typically in late April or early May instead of late June or July over the past ten years. As a reminder, this seasonality is not based upon the commodity itself (crude oil or natural gas); rather it is based upon NYSE ARCA Oil & Gas index (XOI). This price-weighted index is composed of major companies that explore and produce oil and gas.

 

 

Both crude oil and natural gas prices have retreated from their respective Russian invasion of Ukraine driven peaks earlier this year as Covid-19 lockdowns in China and on-again/off-again recession fears have weighed on demand expectations. However, actual demand energy has remained relatively firm. Absent meaningful improvement to the supply side prices for energy are likely to remain firm and creep higher. Any disruptions to current supplies could easily send prices spiking higher.

 

SPDR Energy (XLE) is the top pick to trade this seasonality. A new position in XLE could be considered near current levels up to the buy limit of $91.25. Employ an initial stop loss of $79.62. Consider taking profits at the auto sell of $121.76. Exxon Mobil is the top holding in XLE at 22.84%. The remaining top five holdings of XLE are Chevron, Schlumberger, EOG Resources and ConocoPhillips. For tracking purposes, XLE will be added to the portfolio using its average daily price on December 2.

 

 

 

After a mixed start in October, the Sector Rotation portfolio picked up momentum in November. Average performance across all positions held has risen to 11.5% as of the close on November 30. In the prior update, the average performance was 2.5%. As a result of the gains, stop losses for all previous holdings have been adjusted higher. Please see table below for new suggested stop losses for each position.

 

There is just one position in the red in the portfolio, SDPR S&P Biotech (XBI). This is a long-term holding, and we will add to or trim when opportunities present. XBI did participate in the rally which is encouraging. We hold the belief that at some point in the (near) future cures for diseases will become more prevalent than treatments. The companies held by XBI are some of the best candidates to fulfill this belief. XBI can still be considered on dips below its buy limit.

 

Semiconductors have had a challenging year. Our short position worked out quite well, but the subsequent long trade did not as it was stopped out for a modest loss. Last month’s second attempt at a long in iShares Semiconductor (SOXX) also did not pan out as it never traded below our buy limit. With historical seasonal strength in semiconductors coming to an end later this month and SOXX having already made a sizable move, we are cancelling this long trade at this time.

 

Somewhat surprising, the second weakest position in the portfolio is iShares Consumer Discretionary (XLY) with a 3.1% gain. Yes, the consumer is facing numerous headwinds ranging from elevated energy prices and inflation to sizable increases in interest rates, but the numbers from Black Friday/Cyber Monday suggest the consumer still has the means. XLY has also been held in check by sizable positions in its top two holdings, Amazon, and Tesla. XLY can still be considered on dips. 

 

All other positions in the portfolio are on hold. Please see the following table for current advice and updated stop losses.

 

 

 

Results from SPDR DJIA (DIA), SPDR S&P 500 (SPY), Invesco QQQ (QQQ), and iShares Russell 2000 (IWM) have improved nicely since last update. The portfolio’s average gain was 9.1% as of November 30 close compared to 1% prior month. DIA is the top performing position, up 14.7% since our seasonal buy signal on October 4. SPY and IWM also have solid gains of 8.7% and 8.1% respectively. QQQ is still the laggard, but much improved. All four positions are on Hold. As a reminder, officially the “Best Months” strategy does not employ stop losses on these positions. If this risk exceeds one own personal level, a stop loss could be utilized.