ETF Portfolios Update: Range Bound “Worst Months” By: Christopher Mistal | May 02, 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 rally respite that we had been looking for in April arriving and historically bullish April being negative this year, Jeff made the case for continued choppy, volatile trading during this year’s “Worst Months,” May through October. Historically election years have been bullish and that was true through Q1 of this year, but inflation remains stubbornly elevated while economic activity, measured by GDP, has slowed. This has put added pressure on the Fed and the outlook for interest rate cuts this year continues to dim. Factor in the presidential election and two ongoing wars and the market’s upside appears limited.

 

However, we also see the market’s potential downside as being limited. Growth has slowed but remains positive. Employment data has been reasonably firm. Federal government spending remains robust, and the Fed did announce that it will scale back quantitative tightening beginning in June while the hope of rate cuts later this year still exists. In closing Jeff reiterated that we remain bullish for the full year, but market upside and downside is likely to be limited through the “Worst Months” before rallying post-election day to a Q4 gain and full-year gains in a range of 8-15%.

 

 

Having closed out positions associated with DJIA and S&P 500 “Best Months” our focus shifts to the remaining NASDAQ positions associated with its “Best Months” that run through June. From NASDAQ Comp’s closing high of 16442.20 on April 11 through its low close of 15282.01 on April 19, it declined 7.06% and fell back under its old all-time high from November 2021 at 16057.44 which is essentially the same level of NASDAQ’s 50-day moving average. This level is likely to act as resistance during any rally.

 

 

Should the current rebound rally falter, we see first support around 15500 which is around the January/February consolidation and just above its April low. Should the April low be taken out, the next level to watch is 15000, around the 2023 yearend highs. Below that level, last summer’s high and the December breakout/January low at 14500 is the next support. Down about 15% from its all-time high is 14000 and last November’s gap higher. In the near term, the jobs report on May 3 and earnings will decide whether NASDAQ continues to rally while a retest of its April low cannot be ruled out.

 

 

From page 94 of the 2024 Almanac, three sectors begin weak/bearish seasonal periods in May: Banking, Gold & Silver (stocks, not the physical metals), and Materials. At this time, we are officially going to pass on trading all three of these short trade setups as the potential reward does not appear to offset potential risks now. Economic growth has slowed, but employment data is holding up which is likely to keep the banking sector from slipping into any substantial retreat than the pullback the sector has already experienced. Physical gold and silver have retreated from recent highs, but the mining stocks have lagged. We suspect that the higher prices for the physical metals are being offset by higher production costs with the net effect on mining stocks being a dull trading range. Lastly, the Materials sector is also likely to get stuck in a trading range as higher costs eat into federal infrastructure spending.

 

Six sectors’ favorable periods come to an end in May. The banking sector long trade in SPDR Financial (XLF) from last October was closed out of the portfolio on March 21 at its auto sell price of $41.83 for a 25.5% gain excluding dividends and trading fees. Portfolio positions associated with Healthcare, Industrials, Materials (long trade from last October), Real Estate, and Transports were all closed out when the Seasonal MACD Sell signal for DJIA and S&P 500 triggered for an average gain of 16.3%.

 

 

April weakness did dampen positions in the portfolio, but average performance remains solid at 12.9% as of the May 1 close. One position that bucked the trend in April was United States Copper (CPER). As CPER rallied higher in April it traded above its auto sell price of 26.65 on April 8 and was sold for a 15.4% gain.

 

As a part of our rotation to a more cautious stance for the “Worst Months,” SPDR Utilities (XLU) can still be considered on dips below its buy limit of $63.80.

 

All other positions in the Sector Rotation portfolio are on hold.

 

 

 

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 maintaining a cautious stance in the portfolio. SHV and SGOV are currently our preferred bond ETFs. SHV and SGOV both pay their dividend monthly, and the current yield is over 5%. This yield is not likely going to change until the Fed cuts rates. Other funds of similar style are also alternatives if your choices are limited and SHV and/or SGOV are not available. Money market funds are also great alternatives.

 

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 sooner, rather than later, 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, these ETFs could easily suffer losses as interest rates rise.

 

We have established partial positions in TLT, AGG, and BND. If the outlook for interest rates and the economy warrants it, we may add to these existing positions when NASDAQ’s Seasonal MACD Sell triggers.