ETF Trades: Hot Julys and Subsequent Declines
By: Christopher Mistal
August 03, 2023
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: 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 surge in 10-year Treasury rates, the U.S. credit rating downgrade and what we expect during the balance of the “Worst Months.”
We also presented the history of past “Hot Julys.” We defined a “Hot July” as any month with a gain of 3% or more. For DJIA, every “Hot July” since 1950, was followed by a retreat that averaged 6.9% from July’s close to a subsequent closing low in the second half. The worst decline was 32.4% in 1987 while the mildest DJIA decline was 0.1% in 1958. The conclusion is “Hot Julys” have led to better Autumn buys as many of the subsequent lows occurred in September and October.
[DJIA Hot July Table]
Appling the same approach to S&P 500 and NASDAQ yielded similar results. S&P 500 and NASDAQ experienced subsequent average declines of 6.2% and 5.5% respectively. S&P 500 also experienced its worst decline in 1987. NASDAQ was not up 3% or more in July 1987. NASDAQ’s worst subsequent decline after a “Hot July” was 1973. After rising 12.3% in July 2022, NASDAQ fell 17.6% from its July close to its low on December 28, its second worst decline. For S&P 500 and NASDAQ, each had one “Hot July” that was not followed by a decline, 1958 for S&P 500 and NASDAQ it was in 1980.
[S&P 500 Hot July Table]
[NASDAQ Hot July Table]
This further reinforces our outlook for the balance of the “Worst Months.” Potential catalysts for a pullback and or correction include rising long-term interest rates, rising crude oil price putting pressure on down trending inflation metrics that could force the Fed to remain hawkish longer, and geopolitical concerns.
New Trade Ideas Based Upon August Sector Seasonalities
Although two new bullish sector trades begin in August, we are going to take a cautious approach. New long trade ideas are suggested on dips. If they do not dip below their respective buy limits, that is fine as we can consider again when the “Worst Months” end. This is consistent with our near-term view that the market is likely to endure some additional weakness during the balance of the third quarter and possibly into early Q4 before rallying again to finish the year.
The biotechnology sector enters its historical favorable season in August. iShares Biotech (IBB) could be considered on dips below a buy limit of $123.50. A stop at $119.90 is suggested. The auto-sell price is $154.97 based upon historical average performance. A 17.5% average gain has occurred over the last 25 years while an average gain of 8.5% has occurred in the most recent 5 years. Top five holdings are: Vertex Pharmaceuticals, Amgen, Gilead Sciences, Regeneron Pharmaceuticals, and IQVIA Holdings.
SPDR S&P Biotech (XBI) can also be considered on dips below $77.50. XBI’s top five holdings include: BridgeBio Pharma, Revolution Medicines, Halozyme Therapeutics, ACADIA Pharmaceuticals, and Catalyst Pharmaceuticals. Compared to IBB, XBI’s holdings tend to be small-cap, growth-orientated holdings. Due to this XBI can exhibit more volatility compared to IBB.
Over the last 25 years, Info-Tech has generated an average return of 11.9%, and for the last five years the average has been a solid 13.6% during its bullish season from mid-August to mid-January. Our top ETF within this sector is iShares DJ US Technology (IYW). Set a buy limit of $101.50 and an initial stop loss of $93.53 if purchased. Should high-tech produce above average gains, profits can be taken at the auto-sell price of $136.29. IYW’s top five holdings are: Apple, Microsoft, Alphabet Class A & C shares, Nvidia, and Meta. These five holdings represent 53.22% of IYW’s total holdings. 
[iShares DJ US Tech (IYW) Daily Bar Chart]
August’s final new trade idea is a short trade in the Semiconductor sector. Over the past 25 years the Semiconductor index (SOX) has declined on average 7.7% from the middle of August through the end of October. More recently, over the last five years this trade has not been all that successful with an average 0.1% gain. AI expectations have fueled the sector substantially higher, but consumer-based product demand like PCs and smartphones appears to be slumping. Today’s disappointing forecast from Qualcomm could be just the beginning of broader sector weakness.
We are going to avoid using a leveraged, inverse ETF and instead consider establishing a short position in iShares Semiconductor (SOXX) on a breakdown below $498.96. If shorted on a breakdown set an initial stop loss at $523.91. Top five holdings of SOXX are: Nvidia, Broadcom, Advanced Micro Devices, Intel, and Texas Instruments.
[iShares Semiconductor (SOXX) Daily Bar Chart]
Sector Rotation ETF Portfolio Updates
The summer doldrums and the worst two-month span (August-September) of the year have arrived. The market has begun to exhibit some seasonal weakness after a “Hot July”. Last month’s trade ideas shorting the transport and industrial sectors have not been added to the portfolio. iShares Transportation (IYT) can still be shorted on a breakdown below $252.69. SPDR Industrials (XLI) can also still be considered on a breakdown below $108.78. The rebound in crude oil in July appears to have not yet impacted either IYT or XLI. For tracking purposes, IYT and XLI will be added to the portfolio if they close below their respective breakdown prices.
Rising long-term interest rates have put modest pressure on our “Worst Months” defensive positions, XLP, XLV and XLU. Continue to hold these positions mindful of their stop loss prices.
[Almanac Investor Sector Rotation ETF Portfolio – August 2, 2023 Closes]
Tactical Seasonal Switching Strategy Portfolio Update
Rising long-term yields have pressured TLT, AGG and BND. These positions are officially half positions originally established in April. Since issuing our Seasonal MACD Sell for NASDAQ, our preference has been short-term bond ETFs like or similar to SHV and SGOV. Money market funds are also acceptable choices should your options be limited. SHV and SGOV can still be considered at current levels.
As a reminder, 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 Dates for dividends can also be found at the site.
[Almanac Investor Tactical Switching Strategy Portfolio – August 2, 2023 Closes]
Disclosure note: Officers of Hirsch Holdings Inc hold positions in AGG, BND, SGOV, SHV & TLT in personal accounts.