ETF Trades: September Seasonal Selling Sets Up Q4 Rally
By: Jeffrey A. Hirsch
September 07, 2023
For those who were unable to attend the member’s only webinar on Wednesday, the slides and video recording are available here (or copy and paste in a new browser window: I reviewed the status of the “Worst Months” correction so far and the outlook for the rest of 2023. The hot July market did succumb to the usual August correction, but the bulls came back in toward the end of the month, mitigating the selloff. As the calendar rolled into September markets and pundits have gotten jittery again right on cue. 
I touched on the several economic crosscurrents rattling the market currently. Rising fears of inflation being done cooling have put upward pressure on the 10-year Treasury bond yield. This raises the prospects of the Fed not cutting rates anytime soon, increasing them further or at least keeping them higher for longer. This has put pressure on equities at the time of the year when stocks are most prone to weakness.
Robust GDP estimates, while good news for the economy, further fans the inflation and high interest rate flames. Rallying oil prices are also adding to the fears of inflation and elevated rates. We don’t see any prospect for energy prices cooling down and for this reason we are passing on the seasonal Oil & Gas stock sector short that runs from September to November, more on that in a moment. 
As illustrated here in our familiar updated charts, the market continues to follow the trend of our seasonal and 4-year cycle patterns we have been monitoring throughout the year. We anticipate additional weakness through September and potentially into October. September-Octoberphobia combined with inflation and rate fears is likely to trigger further market weakness over the next month or so. A financial sector surprise is also still on the table. We do however expect this weakness to be temporary, in the minor correction range of 5-10%. And this should set up the perennial pre-election year Q4 rally and a solid “Best Months” Seasonal MACD Buy Signal.
[NASDAQ Seasonal Cycle Chart]
[S&P Seasonal Cycle Chart]
[4-year Cycle Chart]
Passing On September Oil & Gas Sector Seasonal Short
Although the oil and gas sector has rallied substantially off the June lows ahead of the seasonal short trade from the beginning of September to the end of November, we must pass on this trade. We don’t like the set up technically or fundamentally. As you can see in the chart of near-term crude oil futures the triple (or even quadruple or quintuple) bottom in June was coming off a long downtrend. That downtrend was first broken in April, which then became support. Then the reduced supple situation sent crude soaring. It has broken through resistance at the April high around 83 and looks headed to take out resistance at the October/November high around 93 soon. 
Here is a chart of the Oil & Gas Sector Index (XOI) along with its seasonal pattern overlaid with SPDR Energy ETF (XLE) and First Trust Natural Gas ETF (FCG). First of all, the FCG rally is being driven by rising oil prices as many firms in the fund produce, market and sell both oil and gas. Natural gas prices are generally driven by inventories. The last release (out today) shows an increase week-over-week and year-over-year. This has been the trend much of the year, hence the flatline in natural gas prices.
But most importantly notice how all three are bucking the seasonal pattern and rallying right through the usual weak period. This means other forces are overriding bearish seasonal factors. Russia and OPEC are clearly enjoying the high price of crude and are very unlikely to increase supply. 
It’s also hurricane season and 2023 forecasts suggest it will be a strong one. The National Oceanic and Atmospheric Administration (NOAA) has increased its 2023 Atlantic hurricane season from “near normal” to “above normal.” I don’t know of any forecast for oil demand to come down anytime soon so, it’s not prudent in our view to short XLE or FCG at this time. 
Sector Rotation ETF Portfolio Updates
August’s correction triggered the utilities trade stop. SPDR Utilities (XLU) was stopped out on August 15 when it closed below its stop loss. It was closed out of the portfolio the next day at $63.88 for a loss of -5.2%. The market’s selloff also caused our three short trades to be executed. 
iShares Transportation (IYT) was shorted on August 15 when it broke down below $252.69. The IYT short is on hold, and we have lowered the stop loss to a breakeven $252.69. SPDR Industrials (XLI) was shorted on August 15 when it broke down below $108.78. The XLI short is also on hold, and we have lowered the stop loss to a breakeven $108.78. iShares Semiconductor (SOXX) was shorted on August 10 when it broke down below $498.96. Also on Hold, set the stop at breakeven $498.96. 
We have added auto-sell short cover prices for all three at a full 10 percentage points above the 15-year average return should the September/October correction materialize as we suspect we want to capitalize on that with these short trades. You could also employ a 2% trailing daily stop. All three are currently profitable and added to those gains today.
Last month’s long Info-Tech sector trade in iShares DJ US Technology (IYW) was not triggered in the August selloff, but it is turning lower again so keep the buy limit of $101.50 with an initial stop loss of $93.53 if purchased. Please review the table and be aware of all the stop losses, buy limits and auto-sell prices.
Regarding some of the queries about gold & silver: Robust economic readings in the face of a rising rate environment have made the odds of a recession quite slim which has dampened investor appetite for gold and silver. Both have been trending flat to lower since early May and do not look attractive. Therefore, we are still passing on any trade or position in gold or silver at this juncture.
[Almanac Investor Sector Rotation ETF Portfolio – September 6, 2023 Closes]
Tactical Seasonal Switching Strategy Portfolio Update
September selling is happening. The market is on edge and threatening to go lower for many reasons stated above. The risk of potentially more interest rate increases (or higher-for-longer), a rising 10-year yield and the end of cooling inflation has continued to pressure our longer-dated bond ETFs. Existing positions in TLT, AGG and BND on are Hold. Cash, money market, and/or short-duration bond ETFs like SHV and SGOV are likely to be the least risky over the last two months of the “Worst Months” year. SHV and SGOV can be considered at current levels.
[Almanac Investor Tactical Switching Strategy Portfolio – September 6, 2023 Closes]
Disclosure note: Officers of Hirsch Holdings Inc hold positions in AGG, BND, SGOV, SHV & TLT in personal accounts.