ETF Trades & Portfolio Updates: Gains Continue to Accumulate
By: Christopher Mistal
February 02, 2023
Whenever we are discussing our January Indicator Trifecta, without fail there is always a question such as, “what about years when the Fed was tightening?” or “this time is different” comes up. It came up in yesterday’s Member’s Only webinar and today we will attempt to answer it with some additional data. If you missed the webinar, you can watch the video and download a copy of the slides here.
In the following table we have taken our January Indicator Trifecta table after a bear market in the previous year and added the closing high and low for the Trifecta year, the largest drawdown of the year along with what the Fed’s key interest rate was at the start of the year and at the end of the year. All S&P 500 data back to 1950 is closing price. There are some interesting similarities as well as differences across the Trifecta years following bear markets. The first striking similarity was for the annual low to be early in the year, most frequently in January. The annual high was nearly as frequently in December. Basically, the textbook perfect, steady rise higher from beginning of the year to its end.
[Expanded January Indicator Trifecta Table]
A second similarity shared across all 13 previous Trifecta years following a bear was a below average drawdown during the year. Using all years since 1950, excluding these 13 Trifecta years, S&P 500 endured an average drawdown of 14.9% compared to just 8.4% for the Trifecta years. Astute observers may notice the 1971 drawdown was a mild bear market as noted on page 134 of the 2023 Almanac. In August of 1971, President Nixon stopped the convertibility of gold and enacted wage and price controls eventually leading to U.S. dollar devaluation. Looking back to 2017, it is nearly unbelievable that the worst drawdown was just 2.8% during the entire year. Nonetheless, 8 of 13 Trifecta years had just single-digit drawdowns. Most of the worst drawdowns in each year started and finished in the “Worst Six Months,” May to October.
Shifting focus to interest rates is where we see the first notable differences appear. Although most of the Trifecta years occurred with Fed Funds somewhere between 2% and 5.5%, they also occurred in rising years, falling years, unchanged years, near zero years and even twice with rates over 10%. Of the two over 10% years, one was rising, and the other was falling. Today’s Fed Funds rate and its currently projected peak would appear to land right in the heart of the range that many past Trifecta years had.
When looking at other significant economic data such as inflation and GDP, past Trifecta years appear to have experienced it all. It would seem no matter how we slice and dice past Trifecta years following bear markets, this year’s Trifecta remains a highly significant and bullish indicator for 2023. It does not guarantee a great year, but it sure does improve the prospects for another solid pre-election year with average to above average gains.
New Sector Seasonalities
There are two sectors that begin their seasonally favorable periods in March: High-Tech and Utilities. As we detail in the 2023 Almanac, on page 94 “Sector Seasonality”, we typically present the trade setups in advance of when the seasonality begins. This year we are going to look to take advantage of any seasonal weakness in February to establish new positions associated with these sectors. As you can see above, even in Trifecta years following bear markets, February has experienced weakness during four of the previous 13 years.
In the following weekly bar chart of the Utility Sector Index (UTY), seasonal strength (lower pane, shaded in yellow) typically begins following an early or mid-March bottom and usually lasts through early October although the bulk of the move is typically done sometime in late May or early June (blue arrow). Recent volatile trading has impacted the seasonal pattern in the lower pane of the chart. Typically the pattern is less choppy as the sector does not usually experience major price swings in a year. Utilities tend to be a defensive sector of the market and historically have seen gains during the “Worst Six Months,” May through October. Declining long-dated Treasury bond yields are also likely to lift utility shares as their dividend becomes increasingly attractive.
[Utility Sector Index (UTY) Weekly Bars and Seasonal Trend Chart]
With nearly $16 billion in assets and ample average daily trading volume, SPDR Utilities (XLU) is our top choice once again to consider holding during Utilities’ seasonally favorable period. It has a gross expense ratio of just 0.10% and a relatively attractive yield approaching 3%. Top five holdings include: NextEra Energy, Duke Energy, Southern Co, Dominion Resources and Sempra Energy.
XLU could be considered on dips with a buy limit of $67.35. This is right around its projected monthly pivot support level (green-dashed line in daily bar chart below). XLU has been drifting sideways to lower since mid-December and could find its seasonal bottom soon. Based upon its 25-year average return of 9.8% (excluding dividends and trading fees) during its favorable period mid-March to the beginning of October, set an auto-sell price at $88.74. If purchased an initial stop loss of $62.06 is suggested.
[SPDR Utilities (XLU) Daily Bar Chart]
Our favorite ETF to trade Infotech’s seasonal strength from mid-March through the beginning of July is iShares DJ US Tech (IYW). Our existing position was up 12.7% as of the close on Feb 1. Any February weakness could be an opportunity to consider establishing a new position or add to an existing position. IYW can be considered on dips.
[iShares DJ US Tech (IYW) Daily Bar Chart]
Sector Rotation ETF Portfolio Update
January’s nearly across-the-board strength translated into solid gains across most of the portfolio. As of the close on February 1, the portfolios Open Position Average Return was 12.6%, up from 6.2% at the start of January. Nine positions have double-digits gains lead by SPDR Materials (XLB) at 21.9%. SPDR Industrials (XLI) are second best, up 20.1% since our Seasonal MACD Buy signal back in early October.
Per last month’s update, iShares DJ US Telecom (IYZ) was closed out of the portfolio on January 6 for a 9.8%. Typically, seasonal strength has come to an end in late December, but broad market strength appears to have extended IYZ’s run into February this year. In hindsight, a tighter trailing stop would have worked better than an outright sell. Nonetheless, the nearly 10% gain, excluding dividends and trading fees, is above the long-term average for the sector.
Healthcare and Energy did not participate in January’s rally. SPDR Healthcare (XLV) slipped modestly over the month but is still 8.7% higher since addition last October. XLV is likely suffering from some rotation out of this somewhat defensive sector and back into higher growth tech stocks. Current weakness in XLV looks like a good opportunity to either establish a new position or add to an existing position. XLV’s current sideways trading range does appear to resemble its sideways range back in mid-2015 through early 2017.
SPDR Energy (XLE) did improve modestly however it is still in the red since its addition to the portfolio in early December. XLE can be considered at current levels. If recession fears and the largest drawdown of the Strategic Petroleum Reserve (SPR) only pushed crude oil down into the $70-80 per barrel range, it could easily rocket higher if no recession materializes when the summer driving season arrives.
Last month’s new trade idea, First Trust Natural Gas (FCG), has not yet traded below its buy limit. FCG can still be considered on dips. Natural gas price has retreated substantially on warmer than average winter weather and FCG is beginning to feel the pressure. With seasonal strength in natural gas companies historically beginning in February, this trade appears to be setting up nicely.
All other positions in the Sector Rotation portfolio can also be considered on dips. Any weakness in February is likely to be brief as the bullish case for all of 2023 continues to build.
[Almanac Investor Sector Rotation ETF Portfolio – February 1, 2023 Closes]
Tactical Seasonal Switching Strategy Portfolio Update
As of yesterday’s close, the Tactical Seasonal Switching Strategy portfolio had an average gain of 10.6% since our Seasonal Buy Signal. SPDR DJIA (DIA) is the best performing position up 13.0%. iShares Russell 2000 (IWM), is the second-best performing position in the basket, up 12.2%. Surging Invesco QQQ (QQQ) is pulling SPDR S&P 500 (SPY) higher and appears to be on track to take over the top spot in the portfolio. For the same reasons mentioned above, all positions in the portfolio can be considered on dips.
As a reminder, 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. For this reason, there are no stop losses associated with these positions. There is also a switching strategy outline on page 64 of the 2023 Almanac that holds these positions throughout pre-election and election years.
[Almanac Investor Tactical Switching Strategy Portfolio – February 1, 2023 Closes]