ETF Trades: October ETF Basket & Seasonal MACD Update – Not Yet! By: Christopher Mistal | October 03, 2024 | 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 showed how strong year-to-date S&P 500 gains through the end of the third quarter (September) have proceeded volatility in October, but November and December remained solid performers on average.

 

Thus far, this year’s “Worst Months” have been choppy with declines in late-July/early August, a second round at the start of September and again here at the beginning of October. DJIA and S&P 500 have even closed at new all-time highs, but NASDAQ and Russell 2000 have not. The market has proven resilient, quickly rebounding following each bout of weakness and it is likely to do so one more time here in October. Current weakness appears to be setting up nicely for our annual Seasonal MACD Buy signal.

 

 

 

As of today’s close, our Seasonal MACD Buy Signal is still on Hold. Faster moving 8-17-9 MACD indicators applied to DJIA, S&P 500 and NASDAQ are now negative.

 

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 748.55 DJIA points (1.78%), 116.50 S&P 500 points (2.04%), and 440.15 NASDAQ points (2.46%) to turn all three MACD indicators positive. Continue to hold defensive, “Worst Months” positions. When all of the above criteria have been met, we will send a Special Email Alert.

 

 

Each year while preparing the annual Almanac, we revisit and re-analyze our sector seasonalities (STA 2024 pages 94, 96 and 98) 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. There have also been a few exceptions recently, most notably the Semiconductor sector that enjoyed substantial outsized gains due to the expansion and rollout of AI. 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 2025 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 many iShares and SPDR ETFs. Numerous other ETFs and mutual funds are available that may be a better fit to your specific situation and are perfectly acceptable to trade as well. 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 statistically significant.

 

 

Entry and exit points in the above table 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 gain of 10% or 20%) 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 longer-term Treasury yields have been creeping higher and geopolitical concerns are elevated. When our Seasonal MACD Buy signal triggers, we will evaluate adding open trade ideas at that time.

 

 

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 $64.90. The suggested stop loss is $57.27 and auto-sell is $83.48. Top 5 holdings are: Uber, Union Pacific, United Parcel Service, Delta Airlines, and CSX Corp. 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. The current U.S. port strike on the east and southern coasts, is likely to have a mixed effect on the transportation sector. Companies that service or rely heavily on the closed ports are likely to suffer, but those that do not could benefit as alternative routes are selected.

 

 

Over the last 25 years, Telecom has generated an average return of 6.5% 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 $24.60 and stop loss of $21.71. If above average gains materialize, take profits at the auto-sell of $28.82. Top 5 holdings are: Cisco Systems, Verizon, AT&T, Comcast and Arista Networks. Lower interest rates and AI’s use of networks is likely to continue to drive the sector higher.

 

 

Semiconductors come into favor near October’s end and remain so until the beginning of December. This trade has averaged 14.2% and 19.5% 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 $209.75 and utilize a stop loss of $185.10. Take profits at the auto-sell of $263.49. Top 5 holdings are: Advanced Micro Devices, Broadcom, Nvidia, Qualcomm, and Texas Instruments. Aside from AI, these companies design and produce the chips that run nearly every modern convenience that many now take for granted.

 

 

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 14.6% and Staples 8.4%. SPDR Consumer Discretionary (XLY) and SPDR Consumer Staples (XLP) are the preferred vehicles to execute these trades. XLY can be considered on dips below $188.90. An initial stop loss of $166.70 and an auto-sell at $238.13 are suggested. XLY Top 5 holdings are: Amazon.com, Tesla, Home Depot, McDonald’s, and Lowes. XLP could be purchased on dips below $79.95. Our suggested stop loss is $70.56 and use an auto-sell of $95.34. XLP Top 5 holdings are: Procter & Gamble, Costco Wholesale, Walmart, Coca Cola, and Pepsi. For tracking purposes, there will be two XLP trades listed in the Sector Rotation ETF portfolio. The older position, established as a “Worst Months” trade will likely be closed out when our Seasonal MACD Buy Signal triggers. Members holding an existing position could continue to hold and/or add to their existing XLP position.

 

 

The line between Broker/Dealer and Banking sectors is somewhat blurry with each sector averaging gains of 16.5% and 12.6% over the last 25 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 $44.05 and a stop loss of $38.87 once a position has been entered. The auto-sell is $54.56. 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. And as the Fed cuts rates the yield curve is likely to return to normal (not inverted) and steepen.

 

 

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 9.1% average return over the past 25 years while Pharmaceutical alone has been 6.6%. 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 $149.40. The stop loss is $131.85, and the auto-sell is $179.33. Top five holdings are: Eli Lilly, UnitedHealth Group, Johnson & Johnson, AbbVie, and Merck.

 

 

Industrials have a favorable period that runs from the end of October through the middle of May with historical returns averaging 11.3% over the last 25-year period. Buy SPDR Industrials (XLI) on dips with a buy limit of $132.10. Once purchased, set a stop loss of $116.58 and an auto-sell of $161.67. Top 5 holdings are: General Electric, Caterpillar, RTX Corp, Uber, and Union Pacific. Federal infrastructure spending, conflict in Europe and Mideast, and a growing global population will all support expanding demand for the products and services supplied by this sector. 

 

 

Materials have a favorable period that runs from the beginning of October through the beginning of May with historical returns of 16.2% over the last 25-year period. Buy SPDR Materials (XLB) on dips with a buy limit of $92.10. Once purchased, set a stop loss of $81.28 and an auto-sell of $117.63. Top 5 holdings are: Linde, Sherman-Williams, Freeport-McMoRan, Air Products & Chemicals, and Ecolab. XLB firms broadly suppling the raw materials used by the industrial and products sold by the consumer sectors.

 

 

Computer Tech comes into favor in early October and remains so until the beginning of January. This trade has averaged 12.4% and 15.6% gains over the last 25- and 5-year periods, respectively. SPDR Technology (XLK) is the top selection. Enter this trade on dips with a buy limit of $216.35 and employ a stop loss of $190.93. Take profits at the auto-sell of $267.47. Top 5 holdings are: Apple, Microsoft, NVIDIA, Broadcom, and Salesforce. Apple, Microsoft, and NVIDIA combined account for 40.85% of total assets as of the October 2 close. Unless you have spent the past decade or two in a coma, you likely know the companies and currently use their products and services. Many are directly investing in AI and/or automation that is likely to play a major role in the economy in the future.

 

 

Real Estate has seen returns of 10.9% 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 $92.95 and a stop loss of $82.03 once a position has been entered. The auto-sell is $113.35. Top 5 holdings are: Vanguard Real Estate II Index fund, Prologis, American Tower, Equinix, and Welltower. Lower interest rates should continue to support the real estate sector.

 

 

 

The final short trade in the portfolio, iShares Semiconductors (SOXX) was stopped out on September 26 for a 14.3% loss when it closed above $235.50. Unfortunately, sector volatility caused a classic whipsaw and corresponding loss.

 

However, the two gold-related trades have performed well recently with gold climbing to new all-time highs. GDX and GLD appear to be consolidating recent gains and can still be considered on dips below their respective, updated buy limits. Geopolitical uncertainty, a softer U.S. dollar and Federal deficit spending are all likely to continue to support gold (and the miners).

 

IBB and IYW can also be considered on dips below their buy limits or when our Seasonal MACD Buy Signal triggers. Associated sector seasonalities for biotech and infotech run until next year leaving ample time for further gains.

 

Our seasonal-based bitcoin trade, iShares Bitcoin (IBIT), did not trade below our arguably conservative buy limit over the past month. IBIT can still be considered on dips below $32.00.

 

 

 

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. If you do not have access to these exact ETFs, the idea would be to find similar ETFs or mutual funds to trade instead. Your plan/account administrator is one resource to consider using. Another is the “free” sections of https://www.morningstar.com/. Page 38 of the 2024 Almanac has additional detail.

 

Positions in bond ETFs, TLT, AGG, and BND are on hold. Their performance this year was generally in line with modestly declining interest rates. SHV and SGOV have offered a solid yield around 5% and a generally stable price during the “Worst Months.” SHV and SGOV are also on Hold.