ETF Portfolios Update: Positions Trimmed, Shifting to Neutral Stance By: Christopher Mistal | April 04, 2024 | Email | Print

For those who were unable to attend the member’s only webinar on Wednesday, the slides and video recording with an auto generated transcript are available here (or copy and paste in a new browser window: https://www.stocktradersalmanac.com/LandingPages/webinar-archive.aspx). With the Seasonal MACD Sell signal for DJIA and S&P 500 triggering on the prior day, Jeff focused on the transition the portfolios will be undergoing in anticipation of the “Worst Months” along with a recap of the major seasonal patterns that we have been following recently.

 

In closing Jeff reiterated that we remain bullish for the full year, but with bullish sentiment soaring to multi-year highs, sizable “Best Months” gains in the portfolio, and a Fed that does not appear to be in any hurry to reduce rates, that the market appears vulnerable to some profit taking and even a mild pullback in the near-term.

 

 

In the following table the “Worst Months” performance of DJIA, S&P 500, and NASDAQ have been separated by year of the four-year-presidential-election cycle going back to 1951 for DJIA and S&P 500 and 1971 for NASDAQ. NASDAQ’s “Worst Months” are July through October compared to May to October for DJIA and S&P 500. In 18 election year “Worst Months” periods, DJIA has averaged a meager 0.68%. S&P 500 is modestly better +2.28% while NASDAQ’s average is under just 0.49%. Frequency of gains or percentage of time higher in election years “Worst Months” ranging from 61.1% by DJIA to 77.8% for S&P 500.

 

Despite gains occurring frequently in election year “Worst Months,” average performance for either a four- or six-month period is rather disappointing. Of the 18 election years, only two produced double-digit gains, 1980 and 2020. In 1980 a mild bear ended on April 21 and in 2020 the pandemic induced bear market bottomed on March 23. This year has been the exact opposite with five straight months of gains and well-above average gains in Q1. Two wars raging, elevated geopolitical tensions, an uncertain Fed as inflation’s retreat slows, and a volatile presidential election. Overall risk is high while historically the reward has been lackluster during the “Worst Months.”

 

 

Because of the elevated level of risk that has been historically observed during the “Worst Six Months” of the year and its historically tepid returns, reducing long exposure and developing a defensive strategy is the approach we are taking in the Almanac Investor Stock and ETF Portfolios. We do not merely “sell in May and go away.” Instead, we take some profits, trim or outright sell underperforming stock and ETF positions, tighten stop losses and limit adding new long exposure to positions from sectors that have a demonstrated a record of outperforming during the “Worst Months” period. This week’s Seasonal MACD Sell Signal for DJIA and S&P 500 marks the start of a transition to a more cautious stance.

 

For those with a lower risk tolerance or a desire to take a break from trading, the “Worst Months” are a great opportunity to unwind longs and move into the relative safety of cash, Treasury bonds, gold and/or some combination of traditional defensive assets. Holding cash finally earns something other than zero. Preservation of capital may be more important than growth; the “Worst Six Months” are a good time to simply step aside if you prefer. August, September and/or October have provided some excellent buying opportunities in recent years and could do the same again this year.

 

 

In accordance with Tuesday’s Seasonal MACD Sell signal email Issue, SPDR Health Care (XLV), iShares DJ Transports (IYT), SPDR Industrials (XLI), SPDR Materials (XLB) and Vanguard REIT (VNQ) have been closed out of the portfolio using their average prices on April 3. The average gain across these five positions was 16.3% excluding dividends and trading costs. The largest gain was 21.3% by XLI while VNQ produced the smallest advance at 11.0%. All five of these ETFs are correlated to Sectors that end their historically favorable period in May. In addition to the seasonal factors, a rising crude oil price has historically been a negative on Transports, and to a lesser degree Industrials and Materials. Rate uncertainty and a rising 10-year Treasury yield was also weighing on Real Estate while parts of the Healthcare sector were hit earlier this week with disappointing Medicare Advantage plan payments.

 

Crude oil hitting a 6-month high is supporting SPDR Energy (XLE). Summer driving season is just around the corner which suggests demand will be rising while geopolitical events are escalating fears of supply disruption. XLE was up 19.5% at the close on April 3, and is closing in on its auto-sell price of $99.91. Officially, we will heed our policy if that price is reached, but as an alternative to outright selling, one could utilize a trailing stop approach.

 

Despite the struggles of natural gas, First Trust Natural Gas (FCG) is performing even better, up 24.5%. FCG’s holdings provide a fair amount of exposure to crude oil. As long as crude oil is climbing FCG is also likely to continue to rise. Should it reach its auto-sell price, it could be handled like XLE.

 

Except for SPDR Utilities (XLU), all positions in the Sector Rotation portfolio are on hold. Please note that some stop losses have been updated to account for gains since the last update.

 

 

 

In accordance with Tuesday’s Seasonal MACD Sell signal email Issue, SPDR DJIA (DIA) and SPDR S&P 500 (SPY) have been closed out of the portfolio using their respective average prices from April 3. DIA was sold for a 16.0% gain and S&P 500 had a 19.4% advance, excluding dividends and any trading costs. NASDAQ’s Seasonal MACD Sell signal has not triggered. Invesco QQQ (QQQ) and iShares Russell 2000 (IWM) are on Hold. From now until sometime on or after June 3, 2024, the earliest date that NASDAQ’s Seasonal MACD can trigger, we will be transitioning to a more cautious stance in the portfolios.

 

Part of this transition is reducing exposure to DJIA and S&P 500 correlated holdings and moving into bond ETFs, cash, and money market funds. Accordingly, we have added positions in TLT, AGG, BND, SHV, and SGOV to the portfolio as detailed in Tuesday’s Seasonal MACD Sell email. SHV and SGOV can be considered at current levels. TLT, AGG, and BND have exposure to long-dated Treasury bonds that have historically exhibited more price volatility than short-dated funds such as SHV and SGOV. Should economic data support the Fed cutting rates in June, TLT, AGG, and BND could enjoy solid price appreciation, but if the Fed is forced to delay reducing rates, and/or if inflation and growth accelerate, they could easily suffer losses. Due to this uncertainty, SHV and SGOV are currently our preferred bond ETFs.

 

As a reminder, traders/investors following the Best 6 + 4-Year Cycle switching strategy detailed on page 64 of the Stock Trader’s Almanac 2024 do not need to heed this Seasonal MACD Sell signal for DJIA and S&P 500. However, it is still a good reminder to review existing holdings and consider a cautious stance.