ETF Trades& Updates: Utilities & Infotech’s Next Rally
By: Christopher Mistal
March 07, 2024
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: Jeff kicked off the webinar with a quick recap of how bullish the market has been since last October with four straight months of gains, November through February. Historically, strength like this has been a positive with more gains to follow, but in the near-term sentiment has gotten stretched and so have many technical indicators. Combined with March’s history of volatility, the market does appear susceptible to a modest seasonal pullback. Should a perfectly healthy pullback occur, it could be just the “dip” to add to existing positions or establish new positions as it is an election year, the second-best year of the four-year cycle. 
Important election year perspectives can be found recapped on page 26 of the 2024 Almanac. Historically, the first five months have been better when the party in power retains the White House, the market has been stronger when a sitting president is running for re-election, there have been only six election-year DJIA declines going all the way back to 1896 and only two losses in the last seven months of election years since 1950. Even if the market does take a breather, all these bullish election year forces remain in play for the rest of the year.
New March Sector Seasonalities
There are two sectors that begin their seasonally favorable periods in March: Infotech and Utilities. As we detail in the Stock Trader’s Almanac 2024, on page 94 “Sector Seasonality”, we typically present trade setups in advance of when the seasonality begins. This year we are going to look to take advantage of any seasonal weakness in the first half of March to establish new positions associated with these sectors.
In the following weekly bar chart of the Utility Sector Index (UTY), seasonal strength (lower pane, shaded in yellow) typically begins following an early or mid-March bottom and usually lasts through early October although the bulk of the move is typically done sometime in late May or early June. Recent volatile trading has impacted the seasonal pattern. Typically, the pattern is less choppy as the sector does not usually experience major price swings in a year. Utilities tend to be a defensive sector of the market and historically have seen gains during the “Worst Six Months,” May through October. Should the Fed begin cutting rates later this year, it could spark renewed interest in the Utility sector and its dividends.
[Utility Sector Index (UTY) Weekly Bars and Seasonal Trend Chart]
With over $12 billion in assets and ample average daily trading volume, SPDR Utilities (XLU) is our top choice again to consider holding during Utilities’ seasonally favorable period. It has a gross expense ratio of just 0.09% and a fair yield currently over 3%. Top five holdings include: NextEra Energy, Southern Co, Duke Energy, Constellation Energy, and Sempra Energy.
XLU could be considered on dips with a buy limit of $63.10. This price is just above its 50-day moving average (solid red line) and projected monthly pivot resistance level (red-dashed line in daily bar chart below). XLU has essentially been trading the opposite direction of the 10-year Treasury bond yield. When the 10-year yield soared higher last October, XLU plunged. As the 10-year yield retreated, XLU has been trending higher. Based upon its 25-year average return of 9.29% (excluding dividends and trading fees) during its favorable period mid-March to the beginning of October, set an auto-sell price at $75.86. If purchased an initial stop loss of $55.69 is suggested.
[SPDR Utilities (XLU) Daily Bar Chart]
Our favorite ETF to trade Infotech’s seasonal strength from mid-March through the beginning of July is iShares DJ US Tech (IYW). Our existing position was up 21.9% as of the close on March 6. Any early-March weakness could be an opportunity to consider establishing a new position or add to an existing position. IYW can be considered on dips.
[iShares DJ US Tech (IYW) Daily Bar Chart]
Sector Rotation ETF Portfolio Updates
Two sector seasonalities are scheduled to end during March. The first is a Computer Tech short trade. We passed on this trade setup earlier this year and do not have a corresponding position. The second sector is Biotech. Sell iShares Biotech (IBB). For tracking purposes, IBB will be closed out of the portfolio using its average price on Friday March 8. IBB’s 12.5% gain through the close on March 6, is respectable and better than the sector’s average advance over the last 5- and 10-year periods (page 94 Almanac).
Last month’s new trade idea, First Trust Natural Gas (FCG), was added to the portfolio on February 5 when it traded below its buy limit of $22.52. With a 12.6% gain already, the Natural Gas sector appears to have bottomed right on seasonal schedule. FCG can be considered on dips below its buy limit.
Every position added last October was up double-digits as of March 6. Tech-related XLK and IYW were best up 22.1% and 21.9% respectively. SPDR Financials (XLF) are also performing exceptionally well, up 21.8%. Consumers may be getting fatigued, but consumer sector ETFs XLY and XLP are holding their own, up 10.5% and 11.8% respectively. It would seem betting against the consumer still does not work all that well.
Relatively newer trades related to copper and energy are beginning to show signs of gaining upward momentum. Crude oil continues to hang out just under $80 per barrel but will likely drift higher as the summer driving season begins to ramp up. Waning EV enthusiasm and geopolitical concerns would also suggest additional upside for energy stocks. Copper also appears to be firming as well after bottoming in October of last year. XLE, CPER and COPX can all be considered on dips.
iShares DJ Transports (IYT) completed a 4-for-1 split and began trading at its new price today. All associated prices have been adjusted to account for the split including its stop loss, auto sell, buy limit and its presented price.
In anticipation of some potential weakness in March, all other positions in the Sector Rotation portfolio can also be considered on dips below their respective buy limits in the table below. This applies if you do not have an existing position(s) or if you are looking to add to an existing position(s).
Please note, buy limits and stop losses have been adjusted to account for recent gains.
[Almanac Investor Sector Rotation ETF Portfolio – March 6, 2024 Closes]
Tactical Seasonal Switching Strategy ETF Portfolio Updates
As of yesterday’s close, the Tactical Seasonal Switching Strategy portfolio had an average gain of 16.9% since our Seasonal Buy Signal. Invesco QQQ (QQQ) is the best performing position up 19.0%. SPDR S&P 500 (SPY), is the second-best performing position in the basket, up 17.2%. iShares Russell 2000 (IWM) surged to take the third spot, up 16.8% while SPDR DJIA (DIA) is now the laggard of the group with a 14.7% advance.
All four positions can be considered on dips. Buy limits have been updated to be consistent with current levels.
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 outlined on page 64 of the 2024 Almanac that holds these positions through election years.
[Almanac Investor Tactical Seasonal Switching Strategy ETF Portfolio – March 6, 2024 Closes]
Disclosure note: Officers of Hirsch Holdings Inc held positions in DIA, IWM, QQQ, IWM, COPX and FCG in personal accounts.