ETF Trades & Updates: Volatility Shakeup By: Christopher Mistal | January 09, 2025 | Email | Print

For those who were unable to attend the member’s only webinar on Wednesday, January 8, 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). This time around the focus was on our 2025 Forecast. Jeff discussed recent market jitters within the context of past post-presidential-election years. When looking at the entirety of the four-year cycle, Q1 of post-election years has been a weak spot. This weakness is visible in this updated 4-Year Presidential Election Cycle chart that has been updated through the end of 2024. We will be tracking 2025 and beyond on this chart.

 

 

Because the above chart spans four years of data, the handful of trading days in 2025 so far are difficult to see. But from this big picture view, periods of weakness and strength are visible. Following the solid gains of typical pre-election and election years, the flat to mildly negative Q1 of post-election years is a notable transition. Breaking the 4-year cycle down by quarterly performance in the following bar chart is an even cleaner view of Q1-post-election-year weakness.

 

 

Potential reasons for this lull in the 4-year cycle are numerous, but the uncertainties of a new administration coming to Washington, D.C. are high on the list. The obvious reset of the cycle is a strong possibility. Two years of solid gains, fueled by election spending, result in elevated market valuation. This combination of big gains and an uncertain outlook has led to profit taking in the past and it is playing a role now. Not to mention economic, geopolitical, and monetary policy concerns.

 

But prospects for 2025 remain encouraging. Post-election years have improved since WWII and since 1985 DJIA averages a gain of 17.2% with eight up years and two down. This is the best average gain of the four-year cycle over this period. With just five trading days completed in 2025, we still see our Base Case scenario as the most likely with full-year 2025 gains of 8-12%. But gains are not as likely to be as free flowing as they were over the past two years and volatility is likely to remain elevated.

 

 

Three sectors’ favorable seasons end in January: Info Tech, Computer Tech, and Pharmaceutical. Computer Tech also has a bearish seasonality that begins in January. This bearish seasonality has been mixed at best over the last 10 years, and considering the declines of December, any weakness this year could prove brief. We will pass on the bearish seasonality in Computer Tech and instead continue to hold Computer Tech and Info Tech related positions IYW and XLK in the portfolio. There is no direct position associated with the Pharmaceutical sector in the portfolio to address. However, there is some exposure in the holdings of SPDR Healthcare (XLV) and it has been improving this year after a difficult December.

 

Surging volatility in December did inflict some damage on the portfolio. Older positions in SPDR Materials (XLB) and iShares DJ US Telecom (IYZ) were stopped out. IYZ’s favorable seasonality historically ends in December and its stop loss was increased last update resulting in a 6.8% gain. XLB was modestly down in early December and completely broke down by month’s end, closing below its stop loss on the penultimate day resulting in a 12.4% loss. The selloff appears to be overdone and XLB can be considered on dips below $84.15.

 

Last month’s new trade ideas associated with copper and energy seasonalities also struggled. CPER, COPX, XLE, and XES were all added to the portfolio at their respective buy limits on December 6. COPX, XLE and XES were then quickly stopped out. CPER remains in the portfolio and is up 3.2%. Looking back over the charts, the window for the seasonal lows in copper and energy appears to have been correct, but we were early, and the stops proved too restrictive. With technicals improving for COPX, XLE, and XES, we are going to establish new positions. COPX, XLE, and XES can be considered on dips below their respective buy limits (please see table below).

 

Historically, Semiconductor’s seasonally favorable period comes to an end in December. iShares Semiconductor (SOXX) has struggled, but it also appears to have found support around its stop loss of $210.52. Rather than lock in a modest loss on SOXX, we will continue to hold. Massive investments are still being made in AI that could quickly shake SOXX out of its recent funk.

 

Other positions in the Sector Rotation portfolio can still be considered on dips below their respective buy limits or at current levels. Buy limits have been adjusted, where applicable, to account for current market conditions in the table below. As a reminder, if you have an existing position in an ETF, you can add to it or continue to hold.

 

 

 

After a solid November, December proved to be a challenging month for the market as it continued to wrestle with rising 10-year Treasury bond yields and policy uncertainties as a new administration prepares to take over in Washington, D.C. The rise in 10-year yields is most likely the combination of firm economic growth and stubborn inflation. It has also further muddled an already murky monetary policy outlook. The net result was a retreat in all positions held in the Seasonal Switching Strategy portfolio.

 

The biggest retreat in the portfolio was by iShares Russell 2000 (IWM), sliding from an 8.6% gain a little over one month ago to just 0.4% as of the close on January 8. SPDR DJIA (DIA) has retreated below its original purchase price and is off 0.9%. Invescos QQQ (QQQ) is best, up 3.6%, followed by SPDR S&P 500 (SPY) with a 1.0% advance. QQQ, IWM, DIA, and SPY can all be considered on dips up to their respective buy limits.