November 2018 Trading & Investment Strategy By: | October 25, 2018 | Email | Print

10/25/2018: Dow 24984.55 | S&P 2705.57 | NASDAQ 7318.34 | Russell 2K 1500.40 | NYSE 12118.85 | Value Line Arith 5905.39

 

Psychological: Persistent. According to Investor’s Intelligence Advisors Sentiment survey bulls are still at 50.5%. Correction advisors are at 30.5% and Bearish advisors are just 19.0%. Even after DJIA and S&P 500 gave back nearly all year-to-date gains over 80% of advisors surveyed still expect nothing more than a correction. It’s hard to argue with a trend that has been in place for nearly a decade. Absent a significant reversal in economic data, the current pullback is likely to turn out like every other since the March 2009 low, a good buying opportunity.

 

Fundamental: Firm-ish. U.S. labor market remains quite firm with unemployment at just 3.7%. U.S. GDP is also solid with the Atlanta Fed’s GDPNow model forecasting 3.6% growth for Q3. But, there are a few signs of cracks beginning to form. Housing market and auto sales data has been disappointing. Q3 corporate earnings have also been something less than expected. Share buybacks and tax cuts have boosted earnings, but revenues have been on the light side of expectations at more than just a few companies which has some questioning the validity of 2019 estimates. Estimates remain positive, perhaps just not as high as previously thought. From current market levels and valuations there is still room to the upside.  

 

Technical: Broken. DJIA, S&P 500 and NASDAQ have all sunk below their 50- and 200-day moving averages. Relative strength, Stochastic and MACD indicators are all negative. Without a quick rebound back above 200-day moving averages, lows from earlier in the year could be in play. 2018 lows to watch: DJIA 23533, S&P 500 2581 and NASDAQ 6777.

 

Monetary: 2.00-2.25%. After nearly a decade of zero or near zero interest rates and highly accommodative policy, the Fed appears to have turned somewhat hawkish. Minutes of the last meeting revealed a board that sounds committed to raising rates at a nice steady pace of at least once a quarter, but the Fed’s own growth projections seem to be at odds with continuing this approach. The Fed remains the biggest risk to the market and the economy. 

 

Seasonal: Bullish. November begins the “Best Six Months” for the DJIA and S&P 500, and the “Best Eight Months” for NASDAQ. November also marks the beginning of the best consecutive three-month span November-January. Midterm year Novembers are solid ranking near the top across the board. Our Seasonal MACD Buy signal can trigger anytime now. An email Alert will be sent after the close when it does trigger. 

 

We have been advocating continued patience during the Worst Six Months this year, even in the face of rather bullish indications last month, and that has paid off. Folks were ready to declare “Sell in May” or our Worst Six Months dead, but they forgot about October. We did not and Octoberphobia has stuck again. 

 

The turnaround appears imminent and we expect a clear and solid signal from our MACD Buy Indicator for our Best Months Tactical Seasonal Switching Strategy, but we will remain patient until such signal occurs. The recent volatility and selloff is promising to setup up a more beneficial entry point.

 

As of today’s close, our Seasonal MACD Buy Signal remains on Hold. Our 8-17-9 MACD “Buy” indicator applied to DJIA, S&P 500 and NASDAQ are all negative (blue arrows in charts below). Currently, single day gains of 619.08 DJIA points, 73.50 S&P 500 points and 128.94 NASDAQ points are needed to turn our MACD indicators positive on all three indexes. In percentage terms, DJIA and S&P 500 would need to gain 2.5% and 2.7% respectively while NASDAQ needs 1.8% in a day.

 

 

As a reminder, the criteria to issue our Seasonal MACD Buy Signal is a new buy signal using our 8-17-9 MACD indicator on or after the first trading day of October and DJIA, S&P 500 and NASDAQ must be in agreement. These criteria are not currently satisfied.

 

In the meantime our defensive positons continue to outperform, especially spice-maker McCormick & Co (MKC), well-known on your supermarket shelf, but under Wall Street’s radar when we presented to you last June. Notwithstanding the recent market decline, MKC hit a new all-time high last Friday and traded even higher intraday yesterday and is now up 31.8% from our June write-up to today’s close.

 

Meanwhile, midterm election bombast and backbiting have kicked into high gear and speculation is rampant on both sides of the aisle about who is going to control congress, especially the House of Representatives. It is considered a bit of a coup for a sitting President to have a small loss or gain of House seats. 

 

Pages 32 and 100 of the Stock Trader’s Almanac 2018 details how prosperity is more important than peace to the outcome of the midterm elections and how bullish the days surrounding the midterm elections have been. Many have been concerned that the market will be in trouble if President Trump and the Republican Party lose The House. We have crunched the numbers further and found this has not been the case in the past.

 

Since the passage of the 20th “Lame Duck” Amendment to the Constitution in 1933, which moved the beginning of terms for newly elected members of Congress in the midterms to January 3 right after the election instead of the following December, 13 months later, there have been 5 instances when the sitting President lost control of The House. 

 

As you can see in the table here, it did not have a major negative impact on the market; in fact the market has performed more positively in the past after The House flips from the president’s party to the opposition in the midterms.

 

 

This selloff may actually make the “Sweet Spot” of the 4-Year Cycle (October 2018 to June 2019) even sweeter. The overbought condition of the market has clearly been remedied. Overarching economic and corporate fundamentals remain solid despite tariff worries and tech weakness. Complacent bullish sentiment has retreated. The Best Months of the year are about to begin in the Sweet Spot of the 4-Year Cycle. An attractive buying opportunity looms large. So be ready for our technical MACD Buy Signal to confirm momentum has shifted and it’s time to go long and put risk on again in the US stock market.

 

 

DJIA’s time at new all-time highs in September was brief as an increasing hawkish Fed caused bond yields to creep higher. This, amongst numerous other factors, then triggered the current market retreat and a corresponding spike in market volatility. DJIA quickly slipped through its 50-day moving average, bounced and then its 200-day moving average was broken (1). DJIA’s breakdown has turned both the faster moving and slower moving MACD indicators negative (2). The near-term technical outlook is negative, with earlier year lows potentially coming in play. As long as earlier lows hold and fundamentals don’t erode, the longer-term bullish trend remains intact.

 

 

After gaining ground in ten out of twelve weeks, DJIA suffered three straight weekly declines (3). Last week’s 1107.06 DJIA point loss was the fifth worst weekly loss by points for DJIA ever. However, in percentage terms the 4.2% loss did not even make it into the Top 200 list. S&P 500 (4) and NASDAQ (5) also suffered three straight weeks of declines.

 

Market breath measured by NYSE Weekly Advancers and NYSE Weekly Decliners turned clearly bearish during the weeks with losses, but did not reach the extreme lopsided reading achieved during the January/February correction earlier this year. During the week ending October 12, Decliners outnumbered Advancers by a margin of slightly more than 5 to 1 (6) compared to the extreme reading of nearly 10 to 1 that occurred during the week ending February 2, 2018.

 

Weekly New Highs and New Lows reacted as one would expect during a brisk retreat. New Lows (7) exploded to their highest level since February 2016 while New Highs declined to their lowest level also since February 2016. Look for an expanding number of New Highs and shrinking number of New Lows for confirmation that the market’s pullback has come to an end.

 

30-year Treasury bond yields (8) are at their highest level since July 2014 which is probably not really an issue. The 90-day Treasury rate however, is at its highest level since February 2008. After such a protracted period of near zero interest rates, the Fed’s tightening could be beginning to bite. 

 

 

November maintains its status among the top performing months as fourth-quarter cash inflows from institutions drive November to lead the best consecutive three-month span November-January. The month has taken hits during bear markets and November 2000, down –22.9% (undecided election and a nascent bear), was NASDAQ’s second worst month on record—only October 1987 was worse.

 

November begins the “Best Six Months” for the DJIA and S&P 500, and the “Best Eight Months” for NASDAQ. Small caps come into favor during November, but don’t really take off until the last two weeks of the year. November is the number-three DJIA (since 1950) and NASDAQ (since 1971) month. November is second best for S&P 500 (since 1950) and Russell 2000 (since 1979).  November is the Russell 1000’s best month (since 1979).

 

In midterm years, November’s market prowess is relatively unchanged. DJIA has advanced in 13 of the last 17 midterm years since 1950 with an average gain of 2.5%. S&P 500 has also been up in 13 of the past 17 midterm years, gaining on average 2.6%. Small-caps perform well with Russell 2000 climbing in 6 of the past 9 midterm years, averaging 3.5%. The only real blemish in the November midterm-year record is 1974 (DJIA –7.0%, bear market ended in December).

 

 

 

Options expiration often coincides with the week before Thanksgiving. DJIA posted ten straight gains 1993-2002 and has been up 19 of the last 25 weeks before Thanksgiving. The Monday of expiration week has been streaky, but the net result since 1994 is 15 DJIA gains in 24 years. Options expiration day has a clearly bullish bias, up 12 of the last 16. The week after expiration has been improving lately, up five of the last six after being down five of six from 2006 to 2011.

 

Being a bullish month November has five bullish days, though it does have weak points. NASDAQ and Russell 2000 exhibit the greatest strength at the beginning and end of November. Russell 2000 is notably bearish on the 12th trading day of the month, when the small-cap benchmark has risen just seven times in the last 34 years (since 1984). The Russell 2000’s average decline is 0.41% on the day. Recent weakness around Thanksgiving has shifted DJIA and S&P 500 strength to mirror that of NASDAQ and Russell 2000 with the majority of bullish days at the beginning and end of the month. The best way to trade Thanksgiving is to go long into weakness the week before the holiday and exit into strength just before or after.

 

 

After such a lengthy period of time of relatively consistent market gains accompanied by subdued volatility it’s no wonder why the market’s current action is triggering such a dramatic response. All the talk of 2% and greater market moves seems to suggest this is the first time ever. It is not. October getting off to a rocky start accompanied by a rapid rise in volatility is yet another topic of concern as if this is something new. Again, it is not and we have covered it repeatedly and most recently as our last Alert and in October’s Almanac. 

 

However all the talk about October’s turbulent beginning and its historical tendency to be a turnaround or bear killing month does raise the question, what are the market’s chances of turning around and finishing this October with a gain? To answer this question, we went into our database and started at 1950 for DJIA and S&P 500 (NASDAQ since 1971) and retrieved all past occurrences where the market’s performance in October was negative on the thirteenth trading day of the month. This works out to be yesterday’s close. Prior to this year, DJIA had 28 previous losing starts, S&P 500 had 25 and NASDAQ had 21.

 

DJIA’s worst performance through the thirteenth trading day in October was in 1987 when it plunged 33%. October 1987 was also worst for S&P 500 and NASDAQ. DJIA’s average loss was 3.9%, excluding this year, S&P 500 4.2% and NASDAQ 4.7%. Historically, recovery from these losses by the end of October did not happen that often. DJIA bounced back just 25% of the time to finish October with a gain, S&P 500 recovered just once out of every five (20%) and NASDAQ recovered only 19% of the time. Based upon this data, October 2018 is more likely than not to finish in the red.

 

 

There is potentially some good to come from October weakness. Following November and December performance did generally improve compared to historical averages and frequency of advancing months. The improvement was greatest in December when comparing all Decembers since 1950 to only Decembers following an October that was down on the thirteenth trading day. In all years DJIA’s average gain in December is 1.7% with full-month gains 70.6% of the time compared to a 2.0% average advance and full-month gains 75% of the time. S&P 500 Decembers improve from 1.6% and 75% in all years to 2.4% and 84%. NASDAQ Decembers improve the most jumping from 1.8% and 59.5% to 3.4% and 71.4%. Even if October does finish in the red, there is an above average chance that November and December could be positive.

 

The current situation also plays right into our Seasonal MACD Buy Signal and the “Best Months.” Valuations are coming down and bullish sentiment is softening while economic data is holding up and corporate earnings are forecast to continue to grow solidly. Recent weakness also improves the probability that this “Sweet Spot” go around could see performance approaching, or even besting, historical averages.

 

 

As of today’s close, our Seasonal MACD Buy Signal remains on Hold. Our 8-17-9 MACD “Buy” indicator applied to DJIA, S&P 500 and NASDAQ are all negative (blue arrows in charts below). Currently, single day gains of 841.06 DJIA points, 63.36 S&P 500 points and 72.64 NASDAQ points are needed to turn our MACD indicators positive on all three indexes. In percentage terms, DJIA and S&P 500 would need to gain 3.3% and 2.3% respectively while NASDAQ needs just less than 1% in a day.

 

 

As a reminder, the criteria to issue our Seasonal MACD Buy Signal is a new buy signal using our 8-17-9 MACD indicator on or after the first trading day of October and DJIA, S&P 500 and NASDAQ must be in agreement. These criteria are not currently satisfied.

 

So “Sell in May” Didn’t Work This Year? Not so fast. The answer is: We don’t know yet, the Worst Six Months (WSM) are not over yet. People forget that Sell in May is NOT the whole seasonality. Our Best and Worst Months Tactical Switching Strategies are based on the Dow’s and S&P’s Best Six Months (BSM) from November through April and the Worst Six Months from May through October, and NASDAQ’s Best Eight Months (B8M) from November through June and the Worst Four Months (W4M) from July through October.

 

The market’s rise from May through September was impressive, but folks forgot about October. NASDAQ just made its lowest close since May. And from our NASDAQ Best Eight Months Seasonal Sell Sign on June 21, 2018 at 7712.95 it’s down 5.0% at today’s close.

 

The past two days have reminded everyone of October’s frightful history of crashes, corrections and market calamities. Our October Almanac points out that October is the best midterm month, but we also warned of October’s scary record.

 

“The term “Octoberphobia” has been used to describe the phenomenon of major market drops occurring during the month. Market calamities can become a self-fulfilling prophecy, so stay on the lookout and don’t get whipsawed if it happens…. This year is a midterm year, but the market has been resilient thus far during the Worst Months which may temper full-month October results.”

 

October isn’t over yet, it could still be up solidly after another fast correction, which would likely also give us a sweet Seasonal MACD Buy Signal. Sell in May is not dead, but let’s not count our gains or corrections before they are fully hatched. The Worst Six Months May-October (AKA Sell in May) are not over. Q4 2018 is not over either, in fact it’s only just begun. So there is plenty of time for the 4th quarter rally to materialize as well as the “Sweet Spot” of the 4-year cycle we have spoken a great deal about lately.

 

In all likelihood, the correction has a bit more to go, perhaps as deep as the correction in Q1 this year. Remember all the talk about how long we went without a 10% correction? Well welcome to a little mean reversion. That goes double for all the conjecture that Sell in May has not been working the past 5 years. NASDAQ B8M has. But nevertheless 5 years is not a cycle or statistically significant. Nine years is a little short, but the great recession low of March 2009 was a significant moment and as noted in the table below the BSM has outperformed the WSM, by a considerable margin since 2009 with more gains from NASDAQ’s Best 8 Months.

 

In all likelihood, the correction has a bit more to go until folks start asking out loud “should I sell?” And that should set up our Best Months Seasonal Buy Signal nicely.

 

 

 

As of today’s close, our Seasonal MACD Buy Signal is on Hold. Our 8-17-9 MACD “Buy” indicator applied to DJIA, S&P 500 and NASDAQ are all negative (blue arrows in charts below). Currently, single day gains of 2745.91 DJIA points, 296.62 S&P 500 points and 952.91 NASDAQ points are needed to turn our MACD indicators positive on all three indexes. In percentage terms, DJIA and S&P 500 would need to gain nearly 11% and NASDAQ 13% in a day. All three would be at new all-time highs as well. This is possible, but not highly likely.

 

 

As a reminder, the criteria to issue our Seasonal MACD Buy Signal is a new buy signal using our 8-17-9 MACD indicator on or after the first trading day of October and DJIA, S&P 500 and NASDAQ must be in agreement. These criteria are not currently satisfied.

 

Today was the sixth consecutive day that the S&P 500 has declined. Over this six-trading-day span S&P 500 has declined 6.7%. Russell 2000 has also declined for six straight days. DJIA and NASDAQ logged modest gains on Monday to avoid the losing streak. The last time S&P 500 declined six or more days was in late October/early-November of 2016.  Since 1950, S&P 500 has suffered 118 daily losing streaks of six or more days. Sixty-seven of those streaks ended at six days. The average loss during those past streaks was 3.8%. The average gain the day that the losing streak ended was 0.83%. The smallest, streak-ending single day gain was 0.02% in February 1958 and the best was 4.01 in February 2009.

 

 

In the above chart the average performance 30 trading days before and the 30 trading days after the last 67 S&P 500 losing streaks lasting exactly six days has been plotted. The losing streak is easily identified. Historically, losses incurred during the decline took longer than 30 trading days to recoup. There is also a 56.8% chance, based upon history that S&P 500’s daily losing streak ends at six as 67 of the last 118 did.

 

 

Over the last three weeks since last update, S&P 500 dropped 4.2% through yesterday’s close. Russell 2000 shed 7.5% over the same time period. Overall, the entire Stock Portfolio slipped 0.8% excluding any dividends or trading fees. All three sections of the portfolio declined. Small-caps declined the least, just 0.1%. Mid-caps were lower by 0.7% while Large-caps declined 3.5%. Compared to the S&P 500, the overall portfolio outperformed due to a still sizable cash position and strength from a limited number of positions from June’s Defensive Basket.

 

June’s basket of Defensive Stocks is performing reasonable well. Of the original 21 stocks selected sixteen are still held. Fifteen are positive with an average gain of 10.8%, one is negative and five were stopped out. Including the stopped positions, the basket’s average performance is 4.4% compared to a gain of 0.1% by S&P 500 over the same time period excluding any dividends. 

 

After struggling much of its time in the portfolio, Kla-Tencor Corp (KLAC) plunged below its stop loss yesterday and was closed out of the portfolio at $94.30, its average trading price earlier today. Genpact Ltd (G) also closed below its stop loss on October10 and was closed out of the portfolio today. CBRE Group (CBRE) and TE Connect-LTD (TEL) were also stopped out earlier in the month. KLAC, G and TEL are all technology related and likely got wrapped up in the broad selloff currently underway. CBRE is in the Real Estate sector where housing sales have been slumping.

 

Of the remaining defensive positions, eight are up double digits. The best performing position is still McCormick & Company (MKC), now up 26.8% as of yesterday’s close. Second best is One Gas (OGS) up 19.2%. NJR, MO, AEE, CHD, CMS and UGI are also enjoying double-digit gains.   

 

During last month’s update, while the market was still climbing, we elected to maintain a defensive posture in the portfolio. At this juncture that decision has been confirmed. Several of the weaker positions in the portfolio have been stopped out, but other strong positions have held up or even climbed modestly so far during the current pullback. Continue to maintain a defensive position and heed stop losses until the all clear is sounded. All positions in the portfolio are on Hold. 

 

Please see portfolio table below for updated stop loss suggestions.

 

 

As of today’s close, our Seasonal MACD Buy Signal is on Hold. Our 8-17-9 MACD “Buy” indicator applied to DJIA, S&P 500 and NASDAQ are all negative (blue arrows in charts below). Currently, single day gains of 147.85 DJIA points, 44.29 S&P 500 points and 225.27 NASDAQ points are needed to turn our MACD indicators positive on all three indexes.

 

The criteria to issue our Seasonal MACD Buy Signal is a new buy signal using our 8-17-9 MACD indicator on or after the first trading day of October and DJIA, S&P 500 and NASDAQ must be in agreement. This criterion is not currently satisfied.

 

 

In an effort to improve our service, beginning now, all trades associated with Tactical Seasonal Switching Strategy will be tracked in a separate portfolio. This new table appears below. Our goal is to differentiate this strategy from the Sector Rotation strategy that is on page 92 of the 2018 & 2019 Stock Trader’s Almanac and possibly reduce some confusion that existed when all ETF trades were tracked in a single portfolio.

 

 

For 52 years the new edition of the Stock Trader’s Almanac has been released in the fourth quarter of the year. And for the past seventeen years we have been preparing Almanac Investor readers for the annual October ETF buying spree. This year is no exception, but before delving into October’s seasonalities, let’s do a quick review for new and seasoned followers alike. 

 

Every year while preparing the annual Almanac, we revisit and analyze our sector seasonalities (STA 2019 pages 92, 94 and 96) in depth in order to make adjustments for any new or developing trends. There have been a few minor revisions made to our Sector Seasonalities table in recent years, but for the most part, sector seasonality has been reasonably on track since September 2009 with many sectors producing the bulk of their annual gains during their traditionally favorable periods. Years of sector research allows 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 2019 Almanac table follows. Keen observers and long-time readers will note the absence of several indices. Indices that no longer appear are no longer being calculated or are not readily available in the public domain. In the place of discontinued indices we have added S&P Sector indices. Both long and short trade opportunities are researched and the most statistically viable appear below. Because these indexes are not directly tradable, highly correlated exchange-traded funds (ETFs) are typically chosen to execute trades. Performance over the last 5-, 10- and 15-year time periods is included. We prefer to focus on the 15-year average performance as this period has sufficient data to be seasonally significant. 

 

 

These entry and exit points 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) 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 are below current market levels. Should the market struggle prior to our Seasonal MACD Buy Signal, we want to take advantage of the pullback to begin accumulating the following new positions.

 

 

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 $200.25. The stop loss is $180.23 and auto sell is $255.52. Top 5 holdings are: FedEx, Norfolk Southern, Union Pacific, JB Hunt Transport and United Parcel Service. With nearly 70% of U.S GDP coming from consumers, seasonal strength in the consumer sector overlaps nicely with the transportation sector.   

 

 

Over the last 15 years, Telecom has generated an average return of 5.0%, but for the last 5 years the average has slipped to 3.7% during its bullish seasonality from the middle of October through yearend. The top ETF within this sector is iShares DJ US Telecom (IYZ). Use a buy limit of $29.24 and stop loss of $26.32. If above average gains materialize, take profits at the auto sell of $33.77. Top 5 holdings are: AT&T, Cisco, Verizon, T-Mobile and Motorola. Aggressive competition has not been kind to growth, but IYZ does boast a 12-month trailing yield of 3.27% yield and new offerings could bring consumers in for an upgrade during the holidays.

 

 

Semiconductors come into favor near October’s end and remain so until the beginning of December. This trade has averaged 8.9% and 7.8% gains over the last 15- and 5-year periods, respectively. iShares PHLX Semiconductor (SOXX) is the top selection. Establish new positions with a buy limit of $178.48 and utilize a stop loss of $160.63. Take profits at the auto sell of $213.80. Top 5 holdings are: Broadcom, QUALCOMM, NVidia, Intel and Texas Instruments. These are the companies that design and supply the brains for most of our favorite electronic devices; smart watches, smart phones, PCs, tablets, actions cameras, drones, refrigerators, basically you name it.

 

 

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 15-years Discretionary has an average gain of 13.6% and Staples 8.5%. SPDR Consumer Discretionary (XLY) and SPDR Consumer Staples (XLP) are the preferred vehicles to execute these trades. XLY can be considered on dips below $112.10. An initial stop loss of $100.89 and an auto-sell at $140.08 are suggested. XLY Top 5 holdings are: Amazon.com, Home Depot, McDonald’s, NIKE, and Booking Holdings. XLP could be purchased on dips below $53.05. Maintain the existing stop loss at $45.00 and use an auto-sell of $63.32. XLP Top 5 holdings are: Procter & Gamble, Coca-Cola, Pepsi, Walmart and Philip Morris. XLP is an existing holding in the ETF Portfolio. If you already own, continue to hold the existing position, if you do not currently hold a new position can be considered. 

 

 

The line between Broker/Dealer and Banking sectors is rather blurry with each sector averaging gains of 15.8% and 11.9% over the last 5 years, respectively. Instead of trading two smaller, somewhat less liquid ETFs, SPDR Financial (XLF) is the better choice. Use a buy limit of $27.95 and a stop loss of $25.16 once a position has been entered. The auto sell is $35.45. Its holdings cover all things financial from insurance companies to stock exchanges. Top 5 holdings are: Berkshire Hathaway, JPMorgan Chase, Bank of America, Wells Fargo and Citigroup. Rising interest rates combined with a robust labor market could give this group a boost.

 

 

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 9.2% average return over the past five years while Pharmaceutical alone has been just 5.3%. SPDR Health Care (XLV) does an excellent job of representing both sectors and comes with the added bonus of holding several well-established biotechnology companies as well. XLV is attractive near current levels with a buy limit of $92.75. The stop loss is $83.17 and auto sell is $111.41. Top five holdings are: Johnson & Johnson, Pfizer, UnitedHealth Group, Merck and AbbVie. XLV is also an existing position in the portfolio. If you already own, continue to hold the existing position, if you do not currently hold a new position can be considered.

 

 

Industrials have a favorable period that runs from the end of October through the middle of May with historical returns averaging 11.0% over the last 15- year period. Buy SPDR Industrials (XLI) with a buy limit of $76.50. Once purchased, set a stop loss of $68.85 and an auto sell of $93.41. Top 5 holdings are: Boeing, 3M Co, Honeywell, Union Pacific and General Electric. If growth has accelerated to a higher rate as recent GDP readings have suggested, eventually the materials sector will catch up. The new trade deal between U.S., Canada and Mexico earlier this week suggests the worst of the trade war could be over.

 

 

Materials have a favorable period that runs from the beginning of October through the beginning of May with historical returns of 15.1% over the last 15- year period. Buy SPDR Materials (XLB) with a buy limit of $56.90. Once purchased, set a stop loss of $51.21 and an auto sell of $72.04. Top 5 holdings are: Du Pont, Praxair, Ecolab, Sherman-Williams and Air Products & Chemicals. If growth has accelerated to a higher rate as recent GDP readings have suggested, eventually the materials sector will catch up. Cover the existing short position in XLB. For tracking purposes, it will be closed out of the portfolio using its average price on October 5, 2018.

 

 

Computer Tech comes into favor in early October and remains so until the beginning of January. This trade has averaged 9.3% and 9.4% gains over the last 15- and 5-year periods, respectively. SPDR Technology (XLK) is the top selection. Enter this trade with a buy limit of $72.05 and employ a stop loss of $64.85. Take profits at the auto sell of $86.63. Top 5 holdings are: Apple, Microsoft, Visa, Cisco and Intel. Apple is the largest current holding, at 20.47% of total assets. 

 

 

Real Estate has seen returns of 10.1% and 4.1% over the last 15 and 5 years respectively from the end of October to the beginning of May. Vanguard REIT (VNQ) is our choice. Use a buy limit of $76.20 and a stop loss of $68.58 once a position has been entered. The auto sell is $92.29. Top 5 holdings are: Vanguard Real Estate II Index fund, American Tower, Simon Property Group, Crown Castle Intl. and Prologis.

 

 

 

In recent days some of the defensive positions held in the portfolio have weakened. Bond funds TLT and AGG have slipped back into the red (excluding any dividends or trading fees). These positions were held as part of an overall seasonal trading strategy that will from time to time underperform the broader market however, over the longer-term (years and even decades) has proven time and again to be an effective way to manage risk while steadily building wealth. We will continue to hold TLT and AGG until when we issue our Seasonal MACD Buy Signal. In the meantime, a 1% trailing stop loss is suggested. Use daily closing prices for TLT and AGG to update the stop loss.

 

The short position in IYT was stopped out in mid-September (see table below). The materials sector short trade, XLB should be covered. Historical weakness generally comes to an end in mid-October. For tracking purposes, XLB will be closed out using its average price on October 5. 

 

SPDR Utilities (XLU) is also on Hold. Its favorable season also ends in October. Here again utilize a 1% trailing stop loss, updated daily using the closing price of XLU.