ETF Trades: Hot Julys and Patiently Waiting By: Christopher Mistal | August 01, 2024 | Email | Print

In case you missed 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). In the webinar we reviewed key seasonal pattern charts that we have been tracking throughout the year, current GDP and inflation trends, Fed interest rate expectations, and what we expect during the balance of the “Worst Months.”

 

 

In the original research conducted by our illustrious founder and creator of the Stock Trader’s Almanac, the late Yale Hirsch, he defined a “Hot July” market as a gain of 3% or more for the Dow. Today’s carnage notwithstanding, sizable gains yesterday on the last trading day of July buoyed DJIA to a 4.4% gain for July 2024.

 

Every DJIA “Hot July” since 1950 was followed by a retreat that averaged 7.0% from July’s close to a subsequent low in the second half of the year. The worst decline was 32.4% in 1987 while the mildest DJIA decline was 0.1% in 1958. Historically, “Hot Julys” have led to better Autumn buys as many of the subsequent lows occurred in September and October.

 

 

NASDAQ closing down 0.75% for the month and S&P 500 lagging DJIA up just 1.1% underscores our near-term outlook for increased volatility from August to October ahead of this unprecedented presidential election campaign season on the backdrop of a market itching for a Fed rate cut and erratic economic, employment and inflation readings. The past two days’ action are a case-in-point.

 

As noted in our August Almanac and Outlook over the past two weeks and on yesterday’s webinar, notoriously week August is historically much better in election years. However, with the market running hot all year, arguably overbought and way ahead of itself, our cautious stance during the “Worst Four Months” of the year July-October seems the most prudent course of action. Our “Best Months” MACD Seasonal Sell signals on April 2 for DJIA and S&P and June 25 for NASAQ appear to be rather timely at this point.

 

 

Two new bullish sector trades begin in August, but we are going to take a cautious approach. New long trade ideas are suggested on dips. If they do not dip below their respective buy limits, that is fine as we can consider them again when the “Worst Months” end. August has been better in election years, but this August has gotten off to a tough start with some weaker than expected economic data that has only added to already volatile trading.

 

The biotechnology sector enters its historical favorable season in August. iShares Biotech (IBB) could be considered on dips below a buy limit of $140.25. A stop at $123.77 is suggested. The auto-sell price is $205.01 based upon historical average performance plus an additional 20%. A 21.8% average gain has occurred over the last 25 years while an average gain of 4.4% has occurred in the most recent 5 years (page 94 STA 2024) from the beginning of August through the beginning of March. Top five holdings are: Gilead Sciences, Regeneron Pharmaceuticals, Vertex Pharmaceuticals, Amgen, and IQVIA Holdings.

 

 

Over the last 25 years, Info-Tech has generated an average return of 11.8%, and for the last five years the average has been a solid 7.2% during its bullish season from mid-August to mid-January. Our top ETF within this sector is iShares US Technology (IYW). Set a buy limit at $131.00 and an initial stop loss of $115.61 if purchased. Should high-tech produce above average gains, profits can be taken at the auto-sell price of $175.72. IYW’s top five holdings are: Apple, Microsoft, Nvidia, Meta, and Broadcom. These five holdings represent 51.13% of IYW’s total holdings. 

 

 

August’s final new trade idea is a short trade in the Semiconductor sector. Over the past 25 years the Semiconductor index (SOX) has declined on average 7.5% from the middle of August through the end of October. More recently, over the last five years this trade has been nearly as successful with an average 7.1% loss. AI expectations have fueled the sector substantially higher, but the costs of developing and rolling out AI are becoming worrisome. After an initial seemingly unlimited spending spree, demand for anything and everything AI could begin to cool. If lofty expectations are trimmed, then stretched valuations could also quickly normalize as share prices decline.

 

We are going to avoid using a leveraged, inverse ETF and instead consider establishing a short position in iShares Semiconductor (SOXX) on a breakdown below $215.25. If shorted on a breakdown set an initial stop loss at $235.50. Top five holdings of SOXX are: Broadcom, Nvidia, Advanced Micro Devices, Applied Material, and Qualcomm. Broadcom is the top holding in SOXX and the fifth largest holding in IYW. If SOXX is shorted, it is not anticipated it will be held for any longer than its seasonally weak period that ends before Info-Tech’s bullish period.  

 

 

 

The summer doldrums and the worst two-month span (August-September) of the year have arrived. Already the market has begun to exhibit some seasonal weakness after a “Hot July.” Last month’s trade ideas shorting the transport and industrial sectors have not been added to the portfolio. iShares Transportation (IYT) can still be shorted on a breakdown below $63.23. SPDR Industrials (XLI) can also still be considered on a breakdown below $119.62. For tracking purposes, IYT and XLI will be added to the portfolio if they close below their respective breakdown prices.

 

VanEck Gold Miners (GDX) and SPDR Gold (GLD) have both been added to the portfolio. GDX and GLD both opened below their respective buy limits on July 25 and traded the day under them. As a result, both were added to the portfolio using their average daily price on July 25. GDX and GLD can still be considered on dips below their buy limits.

 

Holding SPDR Energy (XLE) with a tight trailing stop loss was effective in capturing some additional upside. XLE was stopped out on July 19 when it closed below its stop loss. XLE was closed out the following day for a 13.0% gain excluding dividends and trading fees. 

 

Easing long-term interest rates has aided our “Worst Months” defensive positions, XLP and XLU. XLU was up 15.4% at yesterday's close and is on Hold. XLP can still be considered on dips. SPDR Healthcare (XLV) never traded below its buy limit and has run away. The defensive trade in XLV is Cancelled.

 

 

 

Sliding long-term yields have also aided TLT, AGG and BND. AGG and BND positions are officially half positions originally established in April. TLT was officially added to on July 22 when it traded under $92.50. TLT’s “Presented Price” has been updated to reflect the purchase of additional shares at a higher price. TLT, AGG and BND are on Hold.

 

Since issuing our Seasonal MACD Sell for DJIA and S&P 500 in early April, our preference has been short-term bond ETFs like or similar to SHV and SGOV. Money market funds are also acceptable choices should your options be limited. SHV and SGOV can still be considered at current levels.

 

 

Disclosure note: Officers of Hirsch Holdings Inc hold positions in SGOV, SHV & XLU in personal accounts.