ETF Trades & Portfolio Updates: Bought the Dip, Waiting on Rally By: Christopher Mistal | March 02, 2023 | Email | Print

If you were unable to attend yesterday’s member’s only webinar, the slides and video recording are now available here (https://www.stocktradersalmanac.com/LandingPages/webinar-archive.aspx). In the webinar we presented new charts of CPI, PPI and PCE that suggest the warmer than expected readings from these inflation indexes in January may not be as big of a deal as many have suggested. The charts of PPI and PCE showed that January has historically been the month with the largest increases. The charts also point to the possibility that readings for February could be lower than currently anticipated and the Fed may not be forced to tighten further or longer.

 

We also covered the implications of DJIA closing below its December closing low (page 36 STA 2023) this week and reviewed other Trifecta years where this occurred. Prior to this year, there were only three other Trifecta years where DJIA closed below its December closing low, 1952, 1966, and 1996. DJIA only briefly dipped below its December closing low in 1952. 1966 was a midterm year with a bear market. In 1996, the positive January Trifecta effectively undid the historically negative implications. With DJIA rebounding today, concerns about violating its December closing low are lessened.

 

Updated Four Horsemen of the Economy charts also continue to show no sign of a looming U.S. recession. DJIA has rebounded from its lows of last year, consumer confidence is on the rise, inflation is slowing, and the labor market remains firm. We contend that negative GDP readings in Q1 and Q2 of 2022 marked the recession that many still seem to be waiting for. And as we have done before, we examined the possibility that some or even all our assumptions are wrong. In summary, we remain bullish for 2023, but anticipate the market to trade choppily higher as it awaits clarity from inflation metrics and the Fed.

 

 

Based upon Sector Seasonality found on page 94 of the Stock Trader’s Almanac 2023, there is one new sector seasonality that begins in April: Computer Tech. Over the last 25 years, Computer Tech has gained an average of 11.6% from around the middle of April until around mid-July. This year we did not close out the position established for this sector back in October in early January. Instead, we held through its historically weak seasonality that normally ends in early March.

 

With over $43 billion in assets and ample average daily trading volume, SPDR Technology (XLK) remains our top choice to consider holding during Computer Tech’s seasonally favorable period. It has a gross expense ratio of just 0.10%. Top five holdings include: Apple, Microsoft, NVDIA, VISA and Mastercard. Please note, Apple and Microsoft combined account for 43.38% of XLK’s holdings as of March 1 close.

 

If you don’t hold a position in XLK or have been waiting for an opportunity to add to an existing position, now appears to be a solid setup. XLK could be considered at its current price up to a buy limit of $138.50. After retreating during the second half of February, technical indicators applied to XLK are beginning to show signs of shifting back to positive. Relative strength (RSI) has begun to tick up after dipping to around the oversold dashed line. XLK’s Stochastic indicator also appears to be on the verge of a bullish crossover in oversold territory and the MACD histogram is also trending toward a bullish crossover.  

 

 

 

Once again February lived up to its historical reputation as the weak link in the Best Months as widespread market weakness in the second half of the month pulled the major indexes lower. Market-wide weakness did translate into declines for many positions in the Sector Rotation portfolio. However, weakness also provided an opportunity to add SPDR Utilities (XLU) and First Trust Natural Gas (FCG). 

 

XLU was added first on February 3 when it traded below its buy limit of $67.35. As of March 1 close, XLU was down 5.1% as rising interest rates in February pushed it lower. Utilities’ bullish seasonality lasts until October. XLU can still be considered at current levels up to its buy limit.

 

FCG was added on February 17 when it dipped below its buy limit. It has since rebounded and was up a modest 2.6% as of March 1. FCG can be considered on dips below its buy limit. A warmer than usual winter has allowed inventories to build, but that extra supply could quickly get consumed if summer temperatures are also above average driving demand for cooling and electricity higher.

 

SPDR Energy (XLE) can also be considered at current levels up to its buy limit of $90.50. Recession fears have weighed on XLE, but it appears to be making its typical seasonal low ahead of the summer driving season. In addition, China’s reopening is also likely to drive demand higher as supply remains tight.

 

In our last ETF portfolio update on February 1, we came into the month of February anticipating some seasonal weakness during the month and had all positions in the portfolio on “buy.” Having bought the dip, we are now awaiting the resumption of the rally. All other positions not previously mentioned in the portfolio are currently on Hold.

 

 

 

As of yesterday’s close, the Tactical Seasonal Switching Strategy portfolio had an average gain of 6.6%. iShares Russell 2000 (IWM) is now the best performing position, up 8.7%. SPDR DJIA (DIA) is the second-best position up 8.4%. Invesco QQQ (QQQ) and SPDR S&P 500 (SPY) were up 4.1% and 5.2% respectively. It is encouraging to see IWM as the leader. We suspect this is due to the January Effect (page 114 of 2023 STA) and improving economic data that still shows no sign of an imminent recession in the U.S.

 

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.