ETF Trades & Seasonal MACD Update: October Basket & Be Patient By: Christopher Mistal | October 05, 2023 | Email | Print

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: https://www.stocktradersalmanac.com/LandingPages/webinar-archive.aspx). Jeff presented updated versions of many of the seasonal pattern charts we have been tracking throughout the year and pointed out that the market selloff in August, September and into October is typical, seasonal weakness along with how it appears to be setting up nicely for our annual Seasonal MACD Buy signal. It has been a challenging “Worst Months,” but it will likely come to an end and just a little more patience is needed.

 

 

As of today’s close, our Seasonal MACD Buy Signal is still on Hold. Faster moving 8-17-9 MACD indicators applied to DJIA and S&P 500 remain negative. NASDAQ’s MACD indicator turned positive on yesterday’s close (10/4). Without confirmation across all three indexes the criteria to issue our Seasonal Buy signal has NOT been met.

 

The criteria to issue our Seasonal MACD Buy Signal is:

 

1. A new buy signal crossover using our 8-17-9 MACD indicator AND

2. The crossover must occur on or after the first trading day of October AND

3. DJIA, S&P 500 and NASDAQ MACD indicators must all agree.

 

 

Currently it would take single-day gains of 613.60 DJIA points (1.85%) and 19.38 S&P 500 points (0.46%) to turn DJIA and S&P 500 MACD indicators positive. NASDAQ’s MACD indicator would turn negative with a daily decline of 215.82 points (1.63%). Continue to hold defensive, “Worst Months” positions.

 

 

Each year while preparing the annual Almanac, we revisit and re-analyze our sector seasonalities (STA 2023 pages 92, 94 and 96) in depth to adjust for any new or developing trends. There have been some minor revisions made to our Sector Seasonality table in recent years, but for the most part, sector seasonality has been reasonably on track with many sectors producing the bulk of their annual gains during their traditionally favorable periods. Years of sector research allow us to specify whether the seasonality starts or finishes in the beginning third (B), middle third (M) or last third (E) of the month based upon the number of trading days in the month. 

 

The soon-to-be available 2024 Almanac table follows. Both long and short trade opportunities are researched and the most statistically viable appear below. Because indexes are not directly tradable, highly correlated exchange-traded funds (ETFs) are chosen to execute trades. When selecting a correlated ETF, we consider daily liquidity, length of time available, fees, and how closely it correlates to the sector index. Frequently this results in the use of numerous iShares and SPDR ETFs. Others are available and may be a better fit for your specific situation. Performance over the last 5-, 10- and 25-year time periods is included. We prefer to focus on the 25-year average performance as this period has sufficient data to be seasonally significant.

 

 

These entry and exit points will be the basis for our seasonal trades over the coming year. They are guidelines, as we generally look to enter new positions before the start of the favorable period and exit before its end. Occasionally a trade is closed out well in advance of the seasonality’s end. An outsized advance may trigger a trade at the suggested auto-sell price (a price target based upon past historical performance of the specific seasonality plus an additional percentage) or should strength fail to materialize, a stop loss could be reached.

 

There are thirteen sector seasonalities that enter their favorable periods in October. The following trade ideas are made based upon these seasonalities. Currently, all buy limits (the suggested maximum to pay for a share) are below current market levels as the market appears to be searching for support as long-term Treasury yields continue to trend higher. When our Seasonal MACD Buy signal triggers, we will evaluate adding open trade ideas at that time. We will remain patient.

 

 

Transports enter their historically favorable season at the beginning of October, and it runs until May. iShares DJ Transports (IYT) is attractive below current levels with a buy limit of $224.34. The suggested stop loss is $200.22 and auto sell is $288.43. Top 5 holdings are: Union Pacific, United Parcel Service, Uber, CSX, and FedEx. Consumers are facing headwinds, but betting against them has not been a good strategy over any lengthy time period. This sector delivers for the consumer. Prior to going long, the short position in IYT will be covered (see below in Updates).

 

 

Over the last 25 years, Telecom has generated an average return of 7.3% during its bullish seasonality from the middle of October through around yearend. The top ETF within this sector is iShares DJ US Telecom (IYZ). Use a buy limit of $20.51 and stop loss of $18.31. If above average gains materialize, take profits at the auto sell of $24.21. Top 5 holdings are: Cisco Systems, Comcast, Verizon, AT&T, and T-Mobile. Aggressive competition, sluggish growth and rising interest rates have hindered the sector, but rates are likely near their peak and new tech is arriving in time for the holiday shopping season.

 

 

Semiconductors come into favor near October’s end and remain so until the beginning of December. This trade has averaged 15.0% and 17.3% gains over the last 25- and 5-year periods, respectively. iShares Semiconductor (SOXX) is the top selection. Establish new positions with a buy limit of $448.13 and utilize a stop loss of $399.96. Take profits at the auto-sell of $566.88. Top 5 holdings are: Advanced Micro Devices, Broadcom, Nvidia, Intel, and Texas Instruments. These are the companies that design and supply the brains for the bulk of our favorite apps and electronic devices; smart watches, smart phones, PCs, tablets, cameras, drones, refrigerators, air conditioners basically you name it. The sector has consolidated from the AI-fueled summer rally. Prior to going long, the short position in SOXX will be covered (see below in Updates).

 

 

Although consumer spending is spilt into two distinct sectors, Discretionary and Staples, their favorable seasons run concurrently from the beginning of October to the beginning of June in the following year. Over the past 25-years Discretionary has an average gain of 15.3% and Staples 8.8%. SPDR Consumer Discretionary (XLY) and SPDR Consumer Staples (XLP) are the preferred vehicles to execute these trades. XLY can be considered on dips below $154.50. An initial stop loss of $137.89 and an auto-sell at $196.02 are suggested. XLY Top 5 holdings are: Amazon.com, Tesla, McDonald’s, Home Depot, and Nike. XLP could be purchased on dips below $65.50. Our suggested stop loss is $58.46 and use an auto-sell of $78.38. XLP Top 5 holdings are: Procter & Gamble, Costco Wholesale, Pepsi, Walmart, and Mondelez.

 

 

The line between Broker/Dealer and Banking sectors is somewhat blurry with each sector averaging gains of 10.6% and 16.0% over the last 5 years, respectively. Instead of trading two smaller, somewhat less liquid ETFs, SPDR Financial (XLF) appears to be the better choice. Use a buy limit of $31.50 and a stop loss of $28.11 once a position has been entered. The auto-sell is $39.53. Its holdings cover all things financial from insurance companies to stock exchanges. Top 5 holdings are: Berkshire Hathaway, JPMorgan Chase, Visa, Mastercard, and Bank of America. As long as the jobs market remains reasonably firm, profits for these two sectors are likely to hold up while it appears much of the inverted yield curve has already been factored in.

 

 

Another area exhibiting a reasonable amount of overlap is the Healthcare and Pharmaceutical sectors, at least as far as many ETFs are concerned. Healthcare has racked up a 7.3% average return over the past five years while Pharmaceutical alone has been 10.4%. SPDR Health Care (XLV) does an excellent job of representing both sectors and comes with the bonus of also holding several well-established biotechnology companies. XLV is attractive, below current levels with a buy limit of $126.51. The stop loss is $112.91, and the auto-sell is $166.84. Top five holdings are: UnitedHealth Group, Eli Lilly, Johnson & Johnson, AbbVie, and Merck. For tracking purposes, we will add to the existing position already in the portfolio should XLV trade below its limit.

 

 

Industrials have a favorable period that runs from the end of October through the middle of May with historical returns averaging 11.6% over the last 25-year period. Buy SPDR Industrials (XLI) with a buy limit of $98.29. Once purchased, set a stop loss of $87.72 and an auto-sell of $120.69. Top 5 holdings are: Caterpillar, Union Pacific, Honeywell, General Electric, and United Parcel Service. Prior to going long, the short position in XLI will be covered (see below in Updates).

 

 

Materials have a favorable period that runs from the beginning of October through the beginning of May with historical returns of 15.7% over the last 25-year period. Buy SPDR Materials (XLB) with a buy limit of $75.94. Once purchased, set a stop loss of $67.78 and an auto-sell of $96.68. Top 5 holdings are: Linde, Air Products & Chemicals, Sherman-Williams, Freeport-McMoRan and Ecolab.

 

 

Computer Tech comes into favor in early October and remains so until the beginning of January. This trade has averaged 14.7% and 9.7% gains over the last 25- and 5-year periods, respectively. SPDR Technology (XLK) is the top selection. Enter this trade with a buy limit of $160.05 and employ a stop loss of $142.84. Take profits at the auto sell of $201.97. Top 5 holdings are: Apple, Microsoft, NVIDIA, Broadcom, and Adobe. Apple and Microsoft combined account for 46.37% of total assets as of the October 4 close.

 

 

Real Estate has seen returns of 10.2% over the last 25 years from the end of October to the beginning of May. Vanguard REIT (VNQ) is our choice. Use a buy limit of $72.62 and a stop loss of $64.81 once a position has been entered. The auto-sell is $87.99. Top 5 holdings are: Vanguard Real Estate II Index fund, Prologis, American Tower, Equinix, and Public Storage.

 

 

 

Surging 10-year Treasury bond yield continued to weigh on the market through September and into early October. Broad weakness was a positive for our short positions in iShares Transportation (IYT), SPDR Industrials (XLI) and iShares Semiconductors (SOXX) but not for biotech related positions. Gains on the short positions range from 5.3% from SOXX to 8.8% for IYT. In anticipation of our upcoming Seasonal MACD Buy signal, we are going to cover the short positions in IYT, XLI, and SOXX. For tracking purposes, these short trades will be closed out using average daily price on Friday, October 6.

 

As a result of higher rates, SPDR Consumer Staples (XLP) was stopped on October 2 when it closed below $68.42. Excluding dividends and any fees, XLP was sold for a modest 2.3% gain. As detailed above, we will be looking to get back into XLP at a lower price or when our Seasonal MACD Buy signal triggers.

 

iShares Biotech (IBB) also stopped out earlier this week on October 3. As of today, this looks like a perfect example of an annoying whipsaw as IBB has already rebounded back above its stop loss price. The tiny bit of silver lining is excluding dividends and fees, there was no loss on IBB. We will look to add IBB back to the portfolio on dips below $118.92 or when our Seasonal MACD Buy signal arrives. SPDR S&P Biotech (XBI) can also be considered on dips below $70.00.

 

 

 

In preparation for the start of the “Best Months” and our Seasonal MACD Buy, Invesco QQQ (QQQ), iShares Russell 2000 (IWM), SPDR DJIA (DIA) and SPDR S&P 500 (SPY) have been added to the portfolio table. These are our preferred ETFs to trade our Seasonal Switching Strategy. Alternate ETFs and mutual funds are also perfectly acceptable. Page 38 of the 2023 Almanac goes into greater detail.

 

Partial positions in bond ETFs, TLT, AGG and BND are on hold. Their poor performance this year was not unexpected as the Fed has remained hawkish with inflation stubbornly remaining above its stated 2% target. Our preference for most of this year’s “Worst Months” has been short-term bond ETFs SHV and SGOV and/or cash. SHV and SGOV are on Hold.