July 2019 Trading & Investment Strategy By: | June 27, 2019 | Email | Print

6/27/2019: Dow 26526.58 | S&P 2924.92 | NASDAQ 7967.76 | Russell 2K 1546.55 | NYSE 12965.31 | Value Line Arith 6159.05

 

Psychological: Rebounding. According to Investor’s Intelligence Advisors Sentiment survey bulls are at 53.3%. Correction advisors are at 28.6% and Bearish advisors are 18.1%. At this level sentiment is in the grey area between neutral and cautious. This suggests it is neither a great time to be buying or selling, instead holding is most likely the best action. Keeping a toe in the exit door may also be a fine idea as well.

 

Fundamental: Reasonably firm. Final Q1 GDP for the U.S. came in at 3.1%. Q2 estimate from Atlanta Fed GDPNow is also hanging in at 1.9% which has been adequate to keep the bull market alive throughout much of its life. Employment remains solid with 75k jobs added in May. Soft areas include tepid inflation (Fed’s preferred metric), corporate earnings, housing, autos and consumer confidence. Soft, being the key word.

 

Technical: Meandering. DJIA, S&P 500 and NASDAQ look to be slipping into a holding pattern while awaiting new info regarding any trade deal with China. All three indexes are near their respective all-time closing highs, but a catalyst to breakout and move on is lacking. A decisive move to new highs by DJIA, S&P 500 and NASDAQ would suggest further gains otherwise more of the same up/down/sideways trading is likely to continue.

 

Monetary: 2.25-2.50%. For now that is. Many signs point to a cut in rates as soon as July. Apparently, the Fed is getting past the notion that rates should be higher because they used to be. In reality the market’s mini meltdown in May and persistently below-target inflation are the real reasons for an increasingly dovish stance.

 

Seasonal: Turning Bearish. July is the best month of the third quarter, but performance in pre-election years has been uninspiring. First half of July likely to be better than second half. NASDAQ’s midyear rally ends on the ninth trading day and July is the beginning of NASDAQ’s “Worst Four Months.” 

 

As you can see in the accompanying chart the U.S. stock market has been tracking rather close to the historical seasonal pattern for Pre-Election Years. As we have pointed out here the past several months, outsized gains are to be expected this year based on the Pre-Election Year pattern illustrated in the chart, especially following our positive January Indicator Trifecta. But we have also warned these gains would not come without pause and correction.

 

 

After the third best first-four-month start to the year since 1950 for the S&P 500, up 17.5%, May was destined for weakness as it is also notoriously weaker in Pre-Election Years. But that augured well for June. Now that June has all but delivered with one trading day left for the month, the prospects for July and the Worst Four Months July-October are less than sanguine. June 2019 is on pace for its best June for the Dow since 1938, the S&P 500 since 1955 and NASDAQ since 1995. 

 

As we noted on the blog last week, historically July has been weaker after a positive June. However, even if July and the Worst Four Months suffer a correction or go sideways as we expect, the full year is still on pace for additional gains after the usual annual soft patch. Also visible in the chart is what we call Christmas in July for NASDAQ. This 12-day Midyear Rally for NASDAQ that runs from the last three trading days of June through the 9th trading day of July appears to be underway. 

 

June is the last month of NASDAQ’s Best 8 Months. Since June 1 we have been on the lookout for our NASDAQ Seasonal MACD Sell signal. June’s impressive move up and the potential for NASDAQ’s Midyear Rally to continue, is setting us up for a near-perfect Seasonal MACD Sell signal for NASDAQ as highlighted in yellow in the NASDAQ chart.

 

 

Following our May 1 Tactical Seasonal Switching Strategy Sell Alert for DJIA and S&P 500 we began shifting to a market neutral posture. We sold SPDR DJIA (DIA) and SPDR S&P 500 (SPY) positions as well as positions in SPDR Financial (XLF), SPDR Industrials (XLI), SPDR Materials (XLB) and iShares DJ Transports (IYT). We tightened up stops on our stock positions, added some bond ETFs as well as SPDR Consumer Staples (XLP). 

 

We have continued to hold Invesco QQQ (QQQ) and iShares Russell 2000 (IWM) and last week we issued our seasonal Defensive Stock Basket with 19 undervalued, growing stocks with solid dividends in the Healthcare, Staples and Utilities sectors, plus the two big Telecoms with monster yields.

 

U.S. equity markets are tracking seasonal patterns closely, which suggests reduced volume trading as folks begin the annual summer exodus from The Street and choppy sideways trading over the next four months. Technical readings and market internals are pointing to a market running out of steam. The world stage is featuring some challenging events. U.S. presidential campaign politics are now ramping up to full swing, highlighting domestic political disputes, standoffs and unfinished business. Diplomatic and trade issues also remain front and center. 

 

Major market gains promise to be hard to come by this summer and early fall. But after that we expect a run to new highs by yearend. So stick to the drill and resist getting sucked into the “summer rally” hype. Our posture remains market neutral and defensive.

 

 

On June 20, DJIA closed within 76 points of its all-time high close of 26828.39 on October 3, 2018 (1). But that was it as DJIA has been slipping slowly lower ever since. S&P 500 did set a new all-time closing high on June 20, but absent support from other major indexes the feat has not been repeated yet. DJIA’s lost momentum is reflected in it slower and faster moving MACD indicators as both have begun to turn toward a new sell crossover (2). 

 

 

June’s brisk rally (and what looks to be a failed breakout attempt) appears to be winding to a close. After six straight weeks of declines, DJIA was due for a rebound and it has lasted three weeks (3). This week, DJIA is on track to end the weekly winning streak. S&P 500 (4) and NASDAQ (5) have also enjoyed three straight weeks of gains in June following May’s sizable losses and four week losing streak. This week’s mild pullback did setup NASDAQ and S&P 500 for a midyear rally that typically lasts until the ninth trading day of July.

 

Market breadth measured by NYSE Weekly Advancers and NYSE Weekly Decliners (6) has been solidly bullish throughout the first three weeks of June. This trend is also on track to come to an end this week even with a few days of mixed trading. 

 

Bullishly, Weekly New Highs (7) have been trending higher throughout June’s rally. During the week ending June 21, New Weekly Highs reached 502. This was the highest reading of the year and the most since the market topped in January 2018. An expanding number of New Weekly Highs is a positive especially when combined with a declining number of New Weekly Lows. This is one confirming sign that there was/is broad participation in the rally.

 

The 30-year Treasury bond yield has fallen to its lowest level since October 2016 (8). A partially inverted yield curve was signaling that the Fed had likely gone far enough with rate increases. This and the market’s May rout (along with trade and heightening international tensions) was apparently enough for the Fed to become even more dovish. The stage has been set for an interest rate cut or two in the near future.

 

 

July historically is the best performing month of the third quarter however, the mostly negative results in August and September make the comparison easy. Two “hot” Julys in 2009 and 2010 where DJIA and S&P 500 both gained greater than 6% and a strong performance in 2013 have boosted July’s average gains since 1950 to 1.2% and 1.1% respectively. Such strength inevitability stirs talk of a “summer rally”, but beware the hype, as it has historically been the weakest rally of all seasons (page 74, Stock Trader’s Almanac 2019).

 

July begins NASDAQ’s worst four months and is the third weakest performing NASDAQ month since 1971, posting a 0.5% average gain. Dynamic trading often accompanies the first full month of summer as the beginning of the second half of the year brings an inflow of new capital. This creates a bullish beginning, a soft week after options expiration and strength towards the end.

 

July’s first trading day is the second best performing first trading day of all twelve months with DJIA gaining a cumulative 1175.74 points since 1998. Over the past 21 years, DJIA’s first trading day of July has produced gains 81.0% of the time with an average advance of 0.42%. S&P 500 has advanced 85.7% of the time (average gain 0.40%). NASDAQ has been slightly weaker at 76.2% (0.26% average gain). No other day of the year exhibits this amount of across-the-board strength which makes a case for declaring the first trading day of July the most consistently bullish day of the year over the past 21 years.

 

Trading on the day before and after the Independence Day holiday is often lackluster. Volume tends to decline on either side of the holiday as vacations begin early and/or finish late. Since 1980, DJIA, S&P 500, NASDAQ and Russell 2000 have recorded net losses on the day after.

 

 

Pre-election-year July rankings are something of a mixed bag, ranking #6 for DJIA and #7 S&P 500, averaging gains of 1.0% and 0.9% respectively (since 1950); while NASDAQ (since 1971) and Russell 1000 (since 1979) pre-election Julys both rank #8. NASDAQ has only advanced in six of the last twelve pre-election Julys. Russell 2000 has advanced in five of its last ten. Despite tech's and small-cap's meager pre-election July track record, NASDAQ and Russell 2000 have averaged gains of 0.9% and 0.3% respectively.

 

 

 

With some help from the Fed’s ever-increasing dovish comments, the market has continued to exhibit strength this month. Even news that Iran shot down a U.S. drone failed to deter the bulls today. S&P 500 traded and closed at new all-time highs today while DJIA and NASDAQ moved closer to doing the same. The market has recovered its losses from May and slightly more but considering it has been approximately seven weeks the move is still not all that impressive. Confirmation of a decisive breakout is still lacking. New highs across the major indexes would be the first sign. Small-cap strength would be another sign that is still missing with the Russell 2000 sorely lagging.

 

As of the market’s close today, both the faster and slower moving MACD indicators applied to NASDAQ were positive. With NASDAQ’s gain today, a one-day decline of 10.0% (801.84 points) would be needed to turn NASDAQ’s MACD Sell indicator negative. A more plausible scenario will be a string of sideways and/or lower trading sessions. 

 

 

When NASDAQ’s MACD Sell indicator becomes negative, we will issue our NASDAQ Seasonal MACD Sell signal and begin clearing out remaining technology and small-cap positions held in the Almanac Investor ETF Portfolios. We will also review current holdings in the Stock Portfolio and act accordingly. Until that time, all technology and small-cap related positions in the portfolios are on Hold.

 

 

In the time since last update through yesterday’s close the Almanac Investor Stock Portfolio advanced 0.7% compared to a 0.1% gain by S&P 500 and a 1.3% loss from the Russell 2000. Large-cap holdings contributed the bulk of the advance across the entire portfolio, advancing 3.8%. Mid-caps also performed adding 0.8%. Small-cap portfolio positions did not do as well, down 0.7%. Mix Telematics (MIXT) was responsible for most of the small-cap decline. MIXT last earnings release is likely the culprit for is recent weak performance. Earnings did beat, but revenues were less than expected. Looking forward estimates remain firm and the company could rebound quickly, especially if small-caps in general return to favor.

 

A quick review of mid-cap holdings reveals three positions with gains since last update and one that has slipped lower. All three of the advancing positions are from last years defensive basket. Algonquin Power (AQN) advanced nearly 9.6%. NJ Resources (NJR) and One Gas (OGS) also advanced handsomely. Verint Systems (VRNT) remains positive since being added to the portfolio but is off its highs from a month ago. Most of VRNT’s recent weakness appears to be wide spread across its industry group, computer software-security. Many of the heavy hitters are also down after logging above average year-to-date gains during the first five months of the year.

 

Last but certainly not least, large-caps. This portion of the portfolio holds the largest concentration of defensive names. The best performing holding is Church & Dwight (CHD), up 53.2% excluding dividends. Abbott Labs (ABT) also enjoyed a notably gain of 7.1% since last update. However, there was one weak area in the large-cap portfolio, copper-related stock Freeport-McMoRan (FCX) was stopped out in mid-May.

 

As we await the arrival of NASDAQ’s Seasonal MACD Sell signal we will continue to maintain a neutral bias in the portfolios. Continue to Hold existing positions and limit new buying. Also consider taking some profits and take note of updated stop loss suggestions in the portfolio table below.

 

 

These 19 stocks were selected from the top performing sectors for the “Worst Six Months.” The sectors we focused upon were Healthcare, Consumer Staples and Utilities. Things have changed from last year this time. With interest rates in decline and the stock market at rather lofty levels Wall Street has already been talking about and driving up the shares of consumer staples and utilities stocks. Healthcare stocks have been consolidating and some of the big names are undervalued. In a bid to potentially further reduce risk; this basket is comprised mostly of large-cap stocks with valuations in excess of $5 billion. Only six mid-cap trade ideas survived the screening process.

 

We first sifted through the universe of nearly 8,000 U.S. traded stocks for those with a market cap of at least $1 billion and average daily volume of 100,000 shares or more on average over the past twenty trading sessions. Then we winnowed the list down to only those stocks with relatively low price-to-sales and price-to-earnings ratios. From there we searched for stocks that were exhibiting consistent and/or growing revenue and earnings trends.

 

We then dug into numerous individual company charts before settling on these final 19 stocks. Our underlying theme was to find reasonably priced stocks within the three sectors that have exhibited the most consistent returns during the “Worst Six Months.” Yields for this basket of stocks range from a low of 1.73% from our old favorite UnitedHealth Group (UNH) to a high of 7.34% by Pattern Energy (PEGI). The entire basket average yield is 3.69%.

 

We will look to add these 19 stocks, in the table below, near current levels. We will allocate a hypothetical $2000 from the cash position in the portfolio to each position. For each stock we have provided the ticker, name, sector, PE, price-to-sales ratio, market value, a dividend yield and a suggested buy limit and stop loss. 

 

 

 

As of the market’s close today, both the faster and slower moving MACD indicators applied to NASDAQ were positive. With NASDAQ’s gain today, a one-day decline of 8.4% (656.31 points) would be needed to turn NASDAQ’s MACD Sell indicator negative. 

 

 

When NASDAQ’s MACD Sell indicator becomes negative, we will issue our NASDAQ Seasonal MACD Sell signal and begin clearing out remaining technology and small-cap positions held in the Almanac Investor ETF Portfolios. We will also review current holdings in the Stock Portfolio and act accordingly. Until that time, all technology and small-cap related positions in the portfolios are on Hold.

 

 

Beef prices tend to form a seasonal high in March as packers have purchased inventory ahead of the summer grilling season. Then as grill masters supplement steaks and burgers with pork ribs, chicken and other delicacies, beef consumption starts to decline in the hot weather. But beef supplies also begin to dwindle as feed lots are short on inventory. 

 

Live Cattle prices typically hit a seasonal low in mid- to late June and then begin to rise before the school season begins as federal government subsidies for school lunch programs kick in for beef purchases. Consumption continues to increase through the winter and holiday season, generally keeping cattle futures prices higher through mid-February.

 

Our top longer-term seasonal play for live cattle is to go long the April 2020 contract near the usual June low on or about June 20 and hold it for 160 days until early February. Over the past 49 years this trade has been positive 33 times for a success rate of 67.3%. After failing to deliver gains in 2015, this trade returned to profitability in 2016 with a modest gain and was again successful in 2017 and 2018. More recently, live cattle appears to be on track to repeat it seasonal pattern again this year. Live cattle reached a high in early March this year and has been falling since with early signs of finding a bottom.

 

 

The weekly chart below depicts the Live Cattle continuous futures contract with iPath Bloomberg Livestock TR ETN (COW) overlaid as a solid black line to illustrate how the two instruments trade somewhat in tandem. Traders may want to look at futures and options strategies, but others may find COW an adequate trading vehicle.  In any event, beef is likely poised for its typical seasonal move up from an early summer low to a mid-winter peak.

 

 

COW is very thinly traded averaging less than 4000 shares per day on average over the past month, but volume does pickup when Live Cattle (or lean hogs) begin to move. As of April 30, 2019, COW was 59.01% Live Cattle and 40.99% Lean Hogs. Caution should be taken with COW. This Exchange-Traded Note, like other unsecured debt securities with no principal protection, carries inherent risk, primarily issuer credit risk, and the risks with COW may be greater. PLEASE READ THE PROSPECTUS, CONSULT YOUR FINANCIAL ADVISOR AND CONDUCT YOUR OWN DUE DILIGENCE. COW could be considered up to a buy limit of $48.50. If purchased, a stop loss of $45.00 is suggested. This trade will be tracked in the Almanac Investor Sector Rotation ETF Portfolio.

 

  

 

In addition to Live Cattle seasonal strength beginning in June, Cocoa, Wheat and Sugar also begin seasonably favorable periods in the month. Outside of the futures market, iPath Bloomberg Cocoa Subindex TR ETN (NIB), Teucrium Wheat (WEAT) and iPath Bloomberg Sugar ETN (SGG) correlate well. However, trading volumes can be even less than COW. Persistent and frequently heavy rains have delayed the planting season this year across many regions of the U.S. Most notably in the corn belt. Futures markets likely do not have the full impacts fully priced in yet.

 

Invesco DB Agriculture Fund (DBA) is a good alternative as it provides exposure to ten different commodities: Live Cattle, Cocoa, Coffee, Corn, Cotton, Feeder Cattle, Lean Hogs, Soybeans, Sugar and Wheat. DBA has assets in excess of $400 million and trades better than 300,000 shares per day on average, offering plenty of liquidity relative to other choices. DBA could be considered up to a buy limit of $17.00. If purchased, a stop loss of $16.10 is suggested. This trade will also be tracked in the Sector Rotation ETF Portfolio. DBA, with 12.3% of assets in live cattle is also a reasonable alternative to thinly traded COW.

 

 

 

May proved to be a challenging month for the market and NASDAQ was not spared from damage during the month. The tech-laden index shed 7.9% in the month. This was worse than DJIA’s 6.7% decline and S&P 500’s 6.6% loss. Nonetheless, NASDAQ’s “Best Eight Months” last through June and thus far June has been much kinder with NASDAQ reclaiming over 2% of May’s losses already (as of mid-day June 6).

 

 

In the chart above, NASDAQ’s tough May and its recent rebound are visible. NASDAQ’s MACD Sell indicator was negative and trending lower throughout the entire month of May, but recent strength has the indicator reversing that trend. Because NASDAQ’s MACD indicator was negative at the start of June, we are looking for a new sell signal to issue our Seasonal MACD Sell for NASDAQ. Before this can occur, MACD will need to first turn positive, which could happen in the next few trading days. 

 

When NASDAQ’s MACD Sell indicator turns negative again, we will issue our NASDAQ Seasonal MACD Sell signal and begin clearing out remaining technology and small-cap positions held in the Almanac Investor ETF Portfolios. Until that time, all related positions are on Hold.

 

 

There is only one new Sector Seasonality that begins in June, a bearish period for natural gas stocks that is based upon the NYSE ARCA Natural Gas Index (XNG). We are going to pass on this trade opportunity this time around as it looks like the stocks and the commodity could be closer to a bottom than a top. Natural gas, the commodity peaked at over $4.50 per mmBTU back in November/December of last year and has fallen to less than $2.40 per mmBTU this week. As a result, XNG is also not very far from its 52-week lows from last December.

 

 

 

In accordance with our Seasonal MACD Sell Alert for DJIA and S&P 500, positions in SPDR Financial (XLF), SPDR Industrials (XLI), SPDR Materials (XLB) and iShares DJ Transports (IYT) were closed out using their respective average prices back on May 2. As of yesterday’s close, only XLB was modestly higher while the others are lower now than one month ago.

 

During May’s selloff, positions in United States Copper (CPER), Global X Copper Miners (COPX), iShares NASDAQ Biotech (IBB), SPDR Energy (XLE) and First Trust Natural Gas (FCG) were stopped out. XLE and IBB are modestly higher now, but CPER, COPX and FCG are lower now than when they were closed out of the portfolio.

 

Last month’s new short trade ideas in gold and silver are struggling. SPDR Gold (GLD) was shorted on May 17 and was stopped out on June 3. iShares Silver (SLV) was shorted on June 3 and is near its stop loss. Throughout the year both had been slipping lower as trade and tariffs seemed to have little impact on price. However once the Fed began signaling its willingness to cut interest rates to support growth, gold and silver both responded with moves higher. We will continue to hold the short position in SLV and a position in DB Gold Double Short (DZZ) with a keen eye on stop losses. The recent spike higher by gold and silver could unwind just as quickly as it occurred especially if the market rebounds and the odds of a rate cut decline.

 

Remaining defensive positions in XLP, XLV and XLU are on Hold. iShares US Technology (IYW) is also on Hold.

 

 

 

Our Seasonal MACD Sell Signal for DJIA and S&P 500 was nearly perfectly timed. It was the cue to lighten up on long exposure and begin adding some defensive positions. Currently the Tactical Seasonal Switching ETF Portfolio is essentially neutral. SPDR DJIA (DIA) and SPDR S&P 500 (SPY) positions have been closed and positions in bond ETFs AGG, BND and TLT have been established. Technology and small-cap related positions also remain as they historically remain in favor through June.

 

All positions in the Tactical Seasonal Switching Strategy portfolio are on Hold. Defensive positions moved higher while the market was retreating in May. NASDAQ and Russell 2000 positions will be held until when NASDAQ’s Seasonal MACD Sell Alert triggers.