ETF Trades: Strong NASDAQ 1st Half Dampens Q3 Prospects By: Christopher Mistal | July 06, 2023 | Email | Print

In case you missed the member’s only webinar on Wednesday, the slides and video recording are available here (or copy and paste in a new browser window: https://www.stocktradersalmanac.com/LandingPages/webinar-archive.aspx). In the webinar we reviewed key seasonal pattern charts that we have been tracking throughout the year, current GDP and inflation trends, Fed interest rate expectations, the end of NASDAQ’s Best Eight Months and what we expect during the balance of the “Worst Months.”

 

We also examined the history of strong NASDAQ first halves and subsequent performance during the remainder of the year. NASDAQ finished the first half of 2023 with a 31.7% gain. This is NASDAQ’s third best first half ever. Only 1975 and 1983 were better. In the following table we compiled all years since 1971 when NASDAQ was up 20% or more in the first half. Reviewing the table, we observed only two times out of the past eleven where the second half of the year was better than the first half (1999 and 2003). July and Q3 were also below average following a 20%+ first half gain while Q4 was better than average.

 

 

This reinforces our existing tepid outlook for Q3 of this year. Today’s much stronger than anticipated jobs data has increased expectations for another Fed interest rate hike and added more uncertainty as to when the Fed will eventually pause. Increasing uncertainty is likely to lead to more volatility and a sideways to possibly lower market during the historically weak third quarter.

 

 

Three new sector seasonalities begin in the month of July. First up is a bearish seasonality in Transports which typically begins in the middle of July and lasts until the middle of October. This seasonality is based upon the Dow Jones Transportation index (DJT). Over the last 10- and 25-year time periods DJT has declined 1.23% and 6.25% on average during this weak timeframe. Industrials also exhibit similar weakness to the transports sector over nearly the same period.

 

iShares Transportation (IYT) is a top choice to establish a short position in to take advantage of seasonal weakness in the transport sector. IYT has nearly $1 billion in assets, has traded an average of over 100,000 shares per day over the past 30 days and has a reasonable 0.39% expense ratio. IYT’s top five holdings include: United Parcel Service, Union Pacific, Uber, Delta Air Lines, and Old Dominion Freight.

 

 

IYT has rallied briskly since the beginning of June and has broken out above its highs from last August, but the rally and breakout appear to be on the verge of failure. Stochastic, relative strength and MACD indicators are beginning to confirm the loss of momentum and possible change in trend. IYT could be shorted on a breakdown below $240.92. If shorted, set an initial stop loss at $252.97, this level is just above IYT’s recent intra-day high.

 

SPDR Industrials (XLI) will be our choice to establish a short position to trade seasonal weakness in the industrial sector. XLI has nearly $15 billion in assets and frequently has over 10 million shares changing hands daily. Its expense ratio of 0.10% is very reasonable. Top five holdings of XLI include: Raytheon Tech, Honeywell, United Parcel Services, Caterpillar, and Union Pacific.

 

 

XLI’s chart and technical indicators do not differ much from the chart of IYT. XLI even experienced the same brisk June rally. XLI has also broken out of a trading range, but its rally appears to be losing momentum as well. XLI could be shorted on a breakdown below $103.90. If shorted, set an initial stop loss at $109.10, this level is just above the closing high on the first trading day of July.

 

July’s final seasonality is for gold & silver mining stocks. This seasonality is based upon strength in the Philadelphia Gold & Silver index that typically begins in late July and lasts until late December. A hawkish Fed all but promising additional interest rate increases appears to be pressuring gold and silver. For now, we are going to pass on this trade as the current situation does not appear favorable.

 

 

Per last month’s update, First Trust Natural Gas (FCG) was sold on June 2 at $22.37 for a modest loss of 2.7% excluding dividends and trading fees. FCG did trade above its original price in June but failed to make any meaningful move higher. Even though this trade did not work out this year, the damage was minimal.

 

SPDR Gold (GLD) was stopped out on June 29 when it closed below its stop loss. It was closed out of the portfolio on the next trading day at $177.18. In addition to the expanding prospects of higher interest rates, the relatively quick resolution to the federal debt ceiling limit at the beginning of June has dampened investor demand for gold.

 

Positions in sectors that have historically performed during the “Worst Months,” XBI, IBB, XLP, XLV and XLU are on Hold.

 

 

 

Per our Seasonal MACD Sell for NASDAQ emailed after the close on June 23, Invescos QQQ (QQQ) and iShares Russell 2000 (IWM) were sold and closed out of the portfolio on June 26. QQQ recorded a 29.2% gain since our Seasonal Buy Signal last October. IWM struggled during the Best Months, but still managed a 4.7% gain excluding dividends and any trading fees.

 

For the first time in nearly two decades, the cash from the sale of “Best Months” positions can earn a reasonable return. In addition to the bond ETFs in the portfolio, money market funds, short-duration Treasuries and similar are also acceptable alternatives. With the Fed signaling more interest rate increases are likely, we currently prefer short-duration focused funds and ETFs. SHV and SGOV can still be considered at current levels. 

 

Please note that many sites and data sources will display a trailing 12-month yield for SHV and SGOV. This may not reflect present yields as interest rates were not at their present levels one year ago. The 30-day SEC yield found on the issuer’s website should be more reflective of current yields and can be found by visiting https://www.ishares.com/us.