Over the past four weeks the ETF portfolio has been on a roller coaster ride. Immediately after last update, the majority of positions were higher, but that all changed in early February. S&P 500’s first 10% correction since the start of 2016 transpired in the matter of a few quick trading sessions. Some sectors fared better than the major indexes while others were worse.

 

As a result of broad weakness, iShares DJ Transports (IYT), iShares PHLX Semiconductor (SOXX), Vanguard REIT (VNQ) and SPDR Energy (XLE) were all stopped out. Each position was closed out in the following trading session using that day’s average price.

 

Mid-January’s new ETF Trade ideas in the natural gas sector, First Trust Natural Gas (FCG) and United States Natural Gas (UNG), were both added to the portfolio and then stopped out. The combination of warmer weather and broad weakness triggered the quick declines.

 

DB Gold Double Short (DZZ) was added to the portfolio yesterday when it traded below its buy limit. DZZ is on Hold. ProShares UltraShort Silver (ZSL) has not yet traded below its buy limit and can still be considered on dips. It is worth noting that gold and silver did not really respond to broad market declines that were at least partially fueled by rising inflation expectations. If market volatility continues to decline, then gold and silver could easy succumb to weak underlying demand.

 

Core “Best Months” positions in SPDR DJIA (DIA), iShares Russell 2000 (IWM), PowerShares QQQ (QQQ) and SPDR S&P 500 (SPY) have all given back a portion of their respective gains, but only IWM is currently in the red (using February 14, 2018 closing price). All four positions remain on Hold. During times of turmoil and volatility it is best to stick to the time-tested strategy and avoid making rash, emotional decisions that more often than not turn out to be wrong.

 

All other positions not previously mentioned are on Hold.

 

 

 

 

Over the four-plus weeks since last update, S&P 500 is only down 1.8% while Russell 2000 is off 2.4% as of yesterday’s close. The Almanac Investor Stock Portfolio’s blend of cash and long positions slipped 3.5% over the same time period excluding dividends and any trading costs. Our Mid-Cap portfolio was the worst performer and responsible for the majority of the overall decline.

 

Once a top performer, Scotts Miracle-Gro (SMG) delivered a disappointing earnings report just as the market began to weaken. Their business is seasonal and winter generally is not a great period for them, but no punches were pulled and shares were slammed on January 30. SMG then closed below its stop loss on February 5 and was closed out of the portfolio the next day.

 

II-VI (IIVI) was another mid-cap position that suffered a sizable decline, dropping from over $50 per share in mid-January to under $40 now. What was a solid performing position turned into a minor loss when it was closed out of February 6.

 

Per last month’s update, positions in KBH, LGIH, MTH, ORBK and PATK were established on January 12 using the day’s average trading price for entry. This ultimately proved to not be the timeliest of purchases. LGIH was stopped out on February 8 and closed out of the portfolio the next day while KBH, MTH and PATK are currently all negative.

 

On a positive note, remaining Free Lunch stocks, shaded in grey have nearly all been closed out. A tight 8% trailing stop loss was in use and this ensured that nearly all of the positions were closed out for a gain. Only CECE was negative. Network-1 Technologies (NTIP) is the sole remaining Free Lunch stock and it should also be closed out. Sell NTIP. For tracking purposes it will be closed out using its average daily price on February 16.

 

Bank stocks and the oldest holdings in Large-Cap Portfolio are other bright spots. ABCB, WAL, UNH, SCCO, ANET and CBG are all higher today than in mid-January. ANET is by far the top performer, up approximately $50 since then.

 

All other positions in the Stock Portfolio are on hold. Please see following table for current advice, buy limits and stop losses.

 

 

 

The blame for this selloff has been placed on a plethora of circumstances. Last Friday’s employment report finally showed wages on the rise, which is good news for the economy, but it stoked inflation fears. Interest rates in turn moved a bit higher, also a positive sign of the U.S. economy’s improving condition, but this also spooked investors and traders that the Fed would speed up the rate tightening cycle, conveniently forgetting how historically low rates remain.

 

Unrestrained crypto currency trading and a tidal wave of Initial Coin Offerings (ICOs) has been compared to the 1999-2000 dotcom bubble IPO craze. A massive short cover in low volatility derivatives, especially inverse VIX Exchange-Traded Products (ETPs), driven by algorithmic trading programs has also been held responsible. Back in our November Outlook we warned, “This market is so robust at the moment that it will likely take some systemic market event. Perhaps it will be triggered by a run in the mushrooming ETF arena….”

 

Market’s also notoriously like to test new Fed chairs and Jerome Powell was confirmed by the Senate on January 23 and sworn in and took office on Monday February 5 just as this selloff ensued. The continuing political battle of the federal budget and debt ceiling and the threat of another shutdown has also given the market jitters. The list goes on.

 

The past five days of large intraday market swings and declines has now delivered the long awaited first 10% correction at today’s close since the February 11, 2016 mini-bear-market bottom, nearly 2 years ago to the day.

 

But the bottom line is rather quite simple. This market got way ahead of itself in typical euphoric frenzy. This confluence of triggers and market rattling events appears to have swung the market pendulum firmly in the other direction in the near-term reverting equity prices to the low end of the uptrend. As you can see in the chart below, since just after the election in 2016 and the initial pop the S&P 500 has been trending higher in a sane uptrend channel. 

 

 

Then in January it spiked far above the upper end of that channel as investors piled into the market not wanting to miss out. At today’s close we have returned to the low of this uptrend channel. We still may dip below this low end of the channel, but there are a few encouraging technical readings. As we reached the low end of the channel at today’s close, the market may have formed a “W” 1-2-3 swing bottom with Tuesday’s intraday low. If we can clear the middle of the “W” high at point 2 (Wednesday’s intra-day high) and close above it that would be encouraging. In addition, the VIX was significantly lower at today’s low than it was at Tuesday’s low.

 

At times like these it is crucial to remember that emotion is our worst enemy and not to succumb to fear and greed and react hastily to current events. Stick to the strategy that has stood the test of time. Our January Indicator Trifecta came in positive this year reinforcing our bullish outlook from our Annual Forecast. And as you all know, February is the weak link in the Best Six Months and large January gains tend to correct or consolidate in February as they recently did in 2016, which was followed by a resumption of the rally. So let’s not make any rash moves and stay the course.

 

Historically, when DJIA closes below its December closing low in the first quarter of the New Year it was frequently an excellent warning sign. Since 1950, this has occurred 35 times, including today. Of the previous 34 occurrences, all but two of the instances experienced further declines, as DJIA fell an additional 10.5% on average. The two years where DJIA did not fall further were 1996 and 2006 (see page 38 of Stock Trader’s Almanac 2018).

 

All instances of DJIA closing below its December low are in the following table. “Rest of the Year % Change,” “Full Year % Change” and January Barometer (“Jan Bar”) are also included. Twenty of the years still logged gains for the rest of the year while eighteen full years finished positive. Years where the January Trifecta was also positive are shaded in grey. Escalation in Vietnam with U.S. planes bombing Hanoi likely contributed to losses in 1966. Increased Federal spending also pushed interest rates and inflation modestly higher that year. There is the possibility that this year could see some further declines, but as long as economic data remains on firm footing then the current pullback is likely to be just a reversion to the trend that has been in place since November 2016. Markets had gotten ahead of the trend in January and are now below it.

 

Historically silver has peaked in February, most notably so in 1980 when the Hunt Brothers’ plot to corner the silver market was foiled. Our seasonal analysis shows that going short on or about February 20 and holding until about April 25 has worked 34 times in the last 45 years for a win probability of 75.6%. As you can see in the short silver table, the usual February silver break was trumped by the overarching precious metal bull market of 2002–2011 just four times in ten years.

 

 

After suffering losses for two years in a row in 2010 and 2011, this trade returned to success with its second best performance in 2012 as precious metals in general fell out of favor. This trade was then successful in 2013, 2014 and 2015. A shaky start for stock markets in early 2016 combined with multi-year lows for silver sparked fresh demand for the metal resulting in a loss that year, but this trade returned to success in 2017.

 

 

In the above chart, silver’s weekly price bars appear in the top half of the chart and silver’s seasonal trend since 1972 appears in the bottom half. Typical seasonal weakness is highlighted in yellow. Historically, silver has declined from late-February/early-March until the end of June. This year, typical seasonal weakness has yet to materialize, but silver is struggling to exceed $17.50 per ounce. After bouncing off mid-December lows, silvers rise has stalled in 2018.

 

 

ProShares UltraShort Silver (ZSL) is an inverse (bearish) ETF that seeks to return two times the inverse of the daily performance of silver bullion priced in U.S. dollars for delivery in London and is one choice to trade this seasonality in the Almanac Investor ETF Portfolio. Average daily trading volume can be light, but when silver does make a move lower, trading activity in ZSL generally does expand quickly. ZSL can be considered on dips below $30.20 or when silver trades above $17.50 per ounce. If purchased, employ a stop loss of $28.15.

 

 

Seasonally, there is also a weak price period for gold from mid-February until mid to late June. Entering a short position on or about February 20 and holding until March 15 has been a successful trade 26 times in the past 43 years for a success rate of 60.5% with a cumulative profit of $43,800 per futures contract. However, in recent years holding onto the short position established in February longer has been the more profitable trade.

 

 

The chart below is a weekly chart of the price of gold with the exchange-traded note (ETN) known as DB Gold Double Short (DZZ) overlaid to show the inverse price correlation between the two trading vehicles. The line on the bottom section is the 43-year average seasonal tendency showing the market’s directional price trend with seasonal weakness highlighted in yellow. DZZ trades 2x the inverse of the daily price change of a single gold futures contract.

 

 

As you can see in this next chart, DZZ may have found a bottom in mid-December. Gold’s rally appears to be stalling around $1350 per ounce. DZZ could be considered on dips below $5.00. If purchased a stop loss of $4.75 is suggested.

 

 

Both of today’s new trade ideas will be tracked in the Almanac Investor ETF Portfolio.