10/28/2020: Dow 26519.95 | S&P 3271.03 | NASDAQ 11004.90 | Russell 2K 1543.28 | NYSE 12415.40 | Value Line Arith 6288.77

 

Fundamental: Mixed. Q3 growth did rebound at a better than expected pace, up 33.1% (advance estimate). Existing home sales were running at a 14-year high in August, but abruptly dipped in September as record high prices weigh. Weekly initial jobless claims are trending lower but remain stubbornly elevated. Corporate earnings have been mostly fair against a rather low bar while estimates continue to climb. Covid-19 cases are climbing at or near record levels depending on location threatening to undo recent easing of restrictions.

 

Technical: Pullback. DJIA, S&P 500 and NASDAQ have all retreated back below their respective 50-day moving averages. Thus far, respective 200-day moving averages have held, but could be tested this time around. DJIA has closed below September’s closing low; S&P 500 and NASDAQ have not. As long as September’s closing lows are not violated by all three indexes, this pullback could be nearing its end.

 

Monetary: 0 – 0.25%. The Fed’s next meeting begins the day after the election, on November 4. No changes to existing policy are expected and it will likely take a backseat to election results. The Fed is still “all in” and it is best not to forget, “don’t fight the Fed.” ZIRP following the financial crisis may not have solved every issue, but it sure did boost the stock market. It wasn’t a straight line higher; there were pullbacks and corrections throughout. It seems reasonable to expect a similar outcome this time around.

 

Seasonal: Bullish. November is the #1 month for S&P 500. It’s also the first month of the “Best Six/Eight Months.” Since 1950, November is #1 DJIA and S&P 500 month in election years. Recent exceptions include November 2000 (undecided election) and 2008 (financial crisis). Keep an eye out for our Official MACD Seasonal Buy Signal. It can trigger anytime now.

 

Psychological: Frothy Again. According to Investor’s Intelligence Advisors Sentiment survey Bullish advisors climbed to 60.6%. Correction advisors stood at 19.2% while Bearish advisors were at 20.2%. These readings came before this week’s market retreat. There may be a modest retreat in Bullish Advisors next reading, but it is not likely to be sizable as the election is nearly here and sentiment generally runs high from around now to yearend.

 

November begins the Best Six Months for the Dow and S&P 500 and NASDAQ’s Best Eight Months. It is also the start of the year’s Best Three-Month Span November-January. Seasonal October volatility has been exacerbated by Presidential election uncertainty and the rapid rise of covid-19 cases worldwide. But this is setting up very well for our Seasonal MACD Buy Signal.

 

When it triggers we will email all subscribers an Alert with instructions on closing out our Bond ETF positons and redeploying into Dow, S&P, NASDAQ and Russell 2000 ETFs. 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. After we get the Seasonal MACD Buy Signal Trigger we will put out a new basket of our top stocks poised to capitalize on our Best Months Strategies.

 

As you can see in the charts below of the Dow, S&P and NASDAQ our MACD Buy Indicators have been heading below the zero line. Crossover buy signals below the zero line have generally provided better buying opportunities. 

 

 

 

October’s market weakness and volatility is actually an encouraging sign for us. While it may be painful to investors and unnerving at times, to us it signifies a return to more normal seasonal market behavior, which sets up the Best Months for solid gains. Updating the chart we presented last month of S&P 500 for 2020 (right axis) overlaid on the One-Year Seasonal Pattern since 1950 and 1988 (left axis) underscores the return of market seasonality. 

 

September and October weakness this year closely mirrors the historical pattern over the past 70-year and 32-year timeframes. S&P also appears to be making a classic late-October low. This October low has not breached the September low so far and if the low on October 28 holds it forms a slightly higher-low uptrend line of support.

 

 

As for handicapping the election, our pal Sam Stovall’s August-October Market “Presidential Predictor” was in the red yesterday until today’s rally put it back in the black. If the S&P closes below its July 31 close of 3271.12 tomorrow that would not be a great sign for an incumbent presidential party win. 

 

Since 1936 when the S&P 500 is up from the July 31 close to the October 31 close in election years the incumbent party wins 85% of the time (11 of 13). When the S&P is down over this three-month span the party in control of the White House has changed 88% of the time (7 of 8).

 

Two misses were likely due to significant third-party candidates derailing reelections in 1968 (Wallace) and 1980 (Anderson). Eisenhower was reelected in 1956 despite the bear market caused by the Suez Crisis/Sinai War in October-November 1956 and Soviet tanks rolling into Hungary to quell the revolution in October 1956.

 

Keep your eye open for our MACD Buy Signal and be leery of election decision delays, congressional inability to pass another stimulus package and a continued rise in covid-19 cases, hospitalizations and deaths that could increase restrictions and weigh on the market. We anticipating some attractive stocks will appear in our new basket. Pay close attention our buy limits and stop losses on all stock and ETF recommendations. 

 

 

September’s pullback abruptly ended late month with a brisk rally that lasted until just before mid-October. Since then, Octoberphobia took over and DJIA shed 8% from its closing high through yesterday’s close. During the surge higher DJIA reclaimed its 50-day moving average briefly and has since receded back below it (1). DJIA has also closed below its September closing low. The longer this breach of support persists, the more likely it is that more weakness is yet to come.

 

Late-September strength delayed our Seasonal MACD Buy signal as the last positive crossover was in September, not October. Recent weakness has turned the faster moving MACD Buy indicator to negative (2) and it is currently trending lower back through the zero line. Crossovers below the zero line have frequently been good buying opportunities. The current situation is setting up in this manner which is encouraging. The slower moving MACD indicator is also negative at this time. Market jitters are likely to persist until a victor is declared in the Presidential election. 

 

 

Following four straight weekly DJIA losses in September, DJIA did enjoy three straight weeks of gains to start off October. However, that streak came to an end last week with DJIA recording its eighth Down Friday/Down Monday (DF/DM) warning of 2020 (3). The election and surging covid-19 cases are key sources of uncertainty and anxiety that could easily spur traders and investors to take profits and increase cash allocations. The longer it takes DJIA to reclaim levels prior to the DF/DM, the likelihood of further weakness also increases.

 

S&P 500 (4) and NASDAQ (5) have also been struggling, tracking out essentially the same pattern as DJIA over the last two months. NASDAQ is the best-performing index of this year, but even that strength has faded. Technology earnings coming up later today could be a catalyst for shares to turn around, but they will likely need to be blow out numbers to shake off election and covid-19 uncertainty.

 

Market breadth measured by NYSE Weekly Advancers and NYSE Weekly Decliners (6) was the first to suggest weakness was brewing behind the gains of the major indexes. DJIA, S&P 500 and NASDAQ all recorded modest weekly gains during the week ending October 16 while NYSE Weekly Decliners outnumbered Advancers by nearly 2 to 1. Weekly Advancers outnumbering Weekly Decliners while major indexes are rising is an indication of broad-based participation and those rallies tend to be more sustainable. 

 

Absent a breakout to new all-time highs, Weekly New Highs (7) and New Lows have remained rather range bound. New Lows did briefly jump above 100 in late September as New Highs fell below 100, but that was quickly reversed in the first half of October. This week is likely to see New Highs tumble again and a modest jump in new lows.

 

As stocks were climbing in early October, the 30-year Treasury rate was also climbing (8). At 1.62% last week, that was the highest since the end of February. Historically this is still low, but when compared to the lows of early August it is a rather noticeable increase that could begin to trickle into the housing market. Gains in housing this year have aided the recovery.

 

 

Over the last seven weeks through yesterday’s close, S&P 500 fell 3.8% while Russell 2000 climbed 1.1%. During the same time period the entire portfolio climbed a modest 0.4% higher excluding dividends and any trading fees. Our Large-cap stocks were responsible for the majority of the overall advance, gaining 1.2%. Our four small-cap positions also contributed to the gain, advancing 0.3%. The two mid-cap positions were mixed, one up and the other down. 

 

Overall performance was held in check by a sizable cash balance. That balance did provide a nice cushion against declines in September and again earlier this week. When our Seasonal MACD Buy signal triggers, we do anticipate putting cash to back to work with a new basket of stocks. We will also hold sufficient cash to ensure our Free Lunch stocks (emailed prior to the open on December 21) can also be included in the portfolio later this year.

 

Because the overall portfolio had a defensive bias, only one position was stopped out since last update. TOTAL S.A. (TOT) was closed out of the portfolio on September 23 after it closed below its stop loss on the previous day. TOT was a speculative trade on crude oil price recovery. That recovery has yet to materialize and it may be quite some time before it does. Covid-19 cases are on the rise again and restrictions are being implemented again in many regions/countries around the globe.

 

AT&T (T) is the worst performing position held, down 12.6% since addition excluding dividends. 5G rollout is likely to be costly, but once availability begins to truly widen, prospects are likely to improve. The idea of a single provider for internet, cell and streaming content seems appealing. At the least 5G service could put real pressure on traditional internet service providers.  

 

All positions in the portfolio are on Hold. Please see table below for specific buy limits, stop losses and current advice.

 

 

As of today’s close, our Seasonal MACD Buy Signal is still on Hold. Our 8-17-9 MACD “Buy” indicators applied to DJIA, S&P 500 and NASDAQ are now negative. Recent market weakness, noted in last update, has persisted long enough to produce a sell crossover. This crossover on all three indexes has reset MACD. We will continue to monitor MACD for its next positive crossover. 

 

The criteria to issue our Seasonal MACD Buy Signal:

 

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 be in agreement.

 

Based upon today’s closing prices, same-day gains of at least 533.98 points (1.88%) for DJIA, 76.66 points (2.22%) for S&P 500 and 453.51 points (3.94%) for NASDAQ are needed to satisfy the above criteria.

 

 

 

Next week provides a special short-term seasonal opportunity, one of the most consistent of the year. The last 4 trading days of October and the first 3 trading days of November have a stellar record the last 26 years. From the tables below:

 

Dow up 77% of the time, 20 of last 26 years, average gain 2.05%, median gain 1.45%.

S&P up 85% of the time, 22 of last 26 years, average gain 2.11%, median gain 1.60%.

NASDAQ up 85% of the time, 22 of last 26 years, average gain 2.67%, median gain 2.30%.

Russell 2000 up 77% of the time, 20 of last 26 years, average gain 2.31%, median gain 2.55%.

 

Many refer to our Best Six Months Tactical Seasonal Switching Strategy as the Halloween Indicator or Halloween Strategy and of course “Sell in May”. These catch phrases highlight our discovery that was first published in 1986 in the 1987 Stock Trader’s Almanac that most of the market’s gains have been made from October 31 to April 30, while the market tends to go sideways to down from May through October.

 

Recent market weakness has held off our Seasonal MACD Buy Signal so far, but it could trigger anytime now. Uncertainty abounds with surging covid-19 cases, a heated presidential election and persistently elevated unemployment. However, each day that passes is one day closer to a covid-19 vaccine. Interest rates are low and ample liquidity is available to support the market and the economy. Additional fiscal stimulus also appears to be coming soon. Debate continues on the amount, but both parties do appear to agree it is needed in one form or another.

 

 

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. However, 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-two DJIA (since 1950), NASDAQ (since 1971) and Russell 2000 (since 1979) month. November is best for S&P 500 (since 1950) and Russell 1000 (since 1979).

 

November’s is a mixed bag in presidential election years. DJIA has advanced in 10 of the last 17 election years since 1952 with an average gain of 1.7%. Significant DJIA declines occurred in 2008 (-5.3%) and 2000 (-5.1%). For S&P 500 November ranks best with a similar record to DJIA. NASDAQ, Russell 1000 and Russell 2000 are not as strong ranking #7, #3 and #6 respectively. Fewer years of data (12 for NASDAQ and 10 for Russell indices) combined with sizable losses in 2000 and 2008 drag down rankings and average gains when compared to DJIA and S&P 500.

 

 

 

Options expiration often coincides with the week before Thanksgiving. DJIA posted ten straight gains 1993-2002 and has been up 20 of the last 27 weeks before Thanksgiving. The Monday of expiration week has been streaky, but the net result since 1994 is 16 DJIA gains in 26 years with 11 advances occurring in the last 16 years. Options expiration day has a clearly bullish bias, up 14 of the last 18. The week after expiration has been a mixed bag recently. DJIA has been up five of the last eight after being down five of six from 2006 to 2011.

 

Being a bullish month November has four 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; the small-cap benchmark has risen just eight times in the last 36 years (since 1984). The Russell 2000’s average decline is 0.39% 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.

 

 

As of today’s close, our Seasonal MACD Buy Signal is still on Hold. Our 8-17-9 MACD “Buy” indicator applied to DJIA, S&P 500 and NASDAQ is positive, but the crossover occurred in late-September. The rally since that late-September crossover has been brisk, fueled by renewed hopes that another massive round of fiscal stimulus would arrive sooner rather than later. But it now appears unlikely that a stimulus deal will be struck before Election Day. As negotiations in Washington began to breakdown (again), DJIA, S&P 500 and NASDAQ have also weakened. Following three days of losses our MACD Buy indicator is fading as well.

 

In the following charts (lower pane of each chart) the MACD Buy indicator appears. The late-September crossover and market rally are visible as well as recent weakness. The shrinking bars over the past few days in the MACD pane are an indication that it is trending toward a sell crossover. When that occurs MACD will be reset. At that point we will continue to monitor MACD for its next positive crossover. As a reminder, 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 be in agreement.

 

The single reason why our Seasonal MACD Buy Signal is on Hold is because the most recent crossover was not on or after the first trading day of October. The last crossover was in September.

 

 

 

Over the long-term, since 1950, our Best Months Switching Strategy with MACD timing has outperformed the major indexes (pages 54 and 60 of 2020 Almanac). Throughout those 70 years for DJIA and S&P 500 and 49 years for NASDAQ there were periods where the strategy outperformed and periods where it underperformed. The roaring bull market of the nineties was one period were our Switching Strategy lagged as the market generally roared higher all year long. But when that period came to an end, the Switching Strategy reclaimed lost ground as DJIA suffered “Worst Months” declines in seven out of eight years from 1998 to 2005.

 

Shortly thereafter the credit and housing market bubbles burst triggering the financial crisis of 2008-09 along with the worst bear market and recession since the Great Depression. In response, the Federal government and Fed took unprecedented (then) actions to support the economy and the market. TARP and massive fiscal stimulus was provided by the government while the Fed cuts interest rates to nearly zero and the market and economy began to recover. Quantitative easing (treasury and mortgage bond buying) by the Fed provided further support and liquidity to the financial system. As a result the market and the economy began to recover, and the market enjoyed well above average gains during the “Worst Months” of 2009.

 

 

 

Since the March 2009 market bottom, the market has enjoyed four periods of outsized gains during the “Worst Months.” The first was 2009, then again in 2013, 2017 and 2020 so far has also saw a sizable “Worst Months” gain. A third round of QE boosted 2013, corporate tax cut anticipation lifted 2017 and this year recovery from the covid-19 shutdown is driving gains. It is primarily these four years and the corresponding seemingly one-off events that have resulted in the market outperforming our Seasonal Switching Strategy over the last twelve years. We are of the opinion that this is an exception, not some kind of new normal where black swan events and major disruptions occur every few years.

 

Some gains have been left on the table by the Seasonal Switching Strategy however, this is only part of the bigger picture. The potential benefits of reduced risk have not been taken into consideration. NASDAQ has not suffered a single decline during its “Best Months” since 2007 (page 60 2020 STA) and its average gain has been 11.2%. This year’s “Best Months” declines by DJIA and S&P 500 were their first since 2008. Even during the last twelve years the pattern of “Best Months” and “Worst Months” has held up. Even though the current “Worst Months” period has not ended yet, average performance is still better during the “Best Months.” 

 

Based upon history, the Seasonal Switching Strategy may be on the verge of beginning its next stretch of outperformance. The general consensus that we have been hearing and seeing is for a return to normal economy and way of life sometime in the next year or so. Uncertainty does remain high, but the desire to do normal things like attend a sporting event, live concert, college in person, dine out, etc. also appears high. We do not believe seasonality is dead, nor do we believe the Seasonal Switching Strategy to be ineffective.

 

 

In this particularly heated election season party bosses and constituents have closed ranks and dug in their heels – as have the candidates. But in the meantime Wall Street soldiers on. From the March pandemic lows stocks were on a tear until seasonal forces returned to the fray and instigated a correction in historically weak September. 

 

Then the turn of the month from the end of September through the first eight days of October exhibited its usual strength. But as the battle for the White House is coming down to the wire a combination of typical mid-October weakness collided with an uptick in jobless claims, faltering stimulus talks and fears of a second wave of the COVID pandemic as cases and hospitalizations are on the rise worldwide.

 

We are all looking for an expeditious decision on the U.S. Presidential Election in less than three weeks. The fear of a prolonged election decision process like we had in the 2000 election is at the forefront of everyone’s mind. In an effort to alleviate investor anxiety we have laid out here the history of market performance from Election Day to yearend for the Dow, S&P 500, NASDAQ and the Russell 2000 small cap index. We’ve broken it out into two tables. One compares index returns for Incumbent Presidential Party Wins vs. Losses and the other for Republican vs. Democratic Presidential wins.

 

 

DJIA and S&P have a longer history and show greater weakness after the election when incumbent party wins with DJIA up 55.6% of the time for on average gain of 1.0%. S&P is notable weaker, up only 44.4% of the time with an average gain of 0.2%, and a median loss of -0.2%, A post-WWII consolidation bear market that started in June 1948 is mostly responsible. 

 

Election years with incumbent party wins have produced better returns for Dow and S&P, but the impact of the undecided election in 2000 and The Great Recession and Financial Crisis in 2008 hit all indices hard with NASDAQ suffering the most. NASDAQ tech stocks and Russell 2000 small cap stocks have historically exhibited much more strength in November and December often outperforming DJIA and S&P large cap blue chip stock. This is clearly evident in all tables.

 

Looking at the breakdown along party lines the numbers are rather close with 1948 and 2008 causing the most damage to Democratic wins and 2000 taking the wind out of Republican victories. The overall yearend strength of NASDAQ tech stocks and the Russell 2000 small caps seems to be the prevailing trend.

 

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 all turned positive in late September. 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 satisfied.

 

 

Although the major indexes are currently modestly positive for the month of October through today’s close, recent trading appears to suggest the full month could prove bumpy and a better buying opportunity is yet to come. Uncertainty remains elevated. Fiscal stimulus is on, then it is off and then it is on again. Election Day also appears to still be an unknown. Polling data seems to work well for predicting the popular vote outcome, but not as well when it comes down to Electoral College votes.

 

Our “Best Months” Seasonal Switching Strategy has outperformed over the long-term despite years like 2020 when seasonality was temporarily overridden. September market weakness along with a choppy start to October suggest seasonality is returning. Should this prove accurate then waiting for our Seasonal MACD Buy signal is the prudent decision.

 

For the past nineteen 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 2020 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 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 2021 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. 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 continue to struggle prior to our Seasonal MACD Buy Signal, we want to take advantage of any weakness or pullback to begin accumulating the following new positions. Any positions left open, will be considered when we issue our Seasonal MACD Buy Signal for DJIA, S&P 500 and NASDAQ.

 

 

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 $192.74. The stop loss is $171.54 and auto sell is $241.91. Top 5 holdings are: FedEx, Norfolk Southern, Union Pacific, Kansas City Southern 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 6.0%, but for the last 5 years the average has improved to 7.1% 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 $25.93 and stop loss of $23.08. If above average gains materialize, take profits at the auto sell of $30.23. Top 5 holdings are: Verizon, AT&T, Motorola, T-Mobile and Cisco Systems. Aggressive competition has hindered the sector in the past, but IYZ does boast a 12-month trailing yield of 2.96%. In the near-term, 5G rollout is likely to be costly, but in the longer-term 5G could replace traditional “wired” high-speed internet connections.

 

 

Semiconductors come into favor near October’s end and remain so until the beginning of December. This trade has averaged 8.4% and 7.7% 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 $285.48 and utilize a stop loss of $254.08. Take profits at the auto sell of $340.41. Top 5 holdings are: Broadcom, NVidia, Intel, QUALCOMM and Texas Instruments. These are the companies that design and supply the brains for the bulk 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 14.1% and Staples 7.9%. SPDR Consumer Discretionary (XLY) and SPDR Consumer Staples (XLP) are the preferred vehicles to execute these trades. XLY can be considered on dips below $139.40. An initial stop loss of $124.07 and an auto-sell at $174.96 are suggested. XLY Top 5 holdings are: Amazon.com, Home Depot, McDonald’s, NIKE, and Lowe’s. XLP could be purchased on dips below $61.55. Maintain the existing stop loss at $56.51 and use an auto-sell of $73.05. XLP Top 5 holdings are: Procter & Gamble, Walmart, Coca-Cola, Pepsi and Costco. 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 XLP, a new position can be considered on dips below the buy limit. 

 

 

The line between Broker/Dealer and Banking sectors is somewhat blurry with each sector averaging gains of 8.6% and 3.2% 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 $22.72 and a stop loss of $20.22 once a position has been entered. The auto sell is $27.77. 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.

 

 

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 5.0% average return over the past five years while Pharmaceutical alone has been just 3.5%. 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 below current levels with a buy limit of $101.07. The stop loss is $89.95 and auto sell is $120.85. Top five holdings are: Johnson & Johnson, UnitedHealth Group, Pfizer, Merck and Abbott Laboratories.

 

 

Industrials have a favorable period that runs from the end of October through the middle of May with historical returns averaging 10.8% over the last 15- year period. Buy SPDR Industrials (XLI) with a buy limit of $74.22. Once purchased, set a stop loss of $66.06 and an auto sell of $90.46. Top 5 holdings are: Union Pacific, United Parcel Service, Honeywell, 3M Company and Lockheed Martin. Despite all the headwinds, the sector has proven resilient. The smallest of positive news or improvement in growth could unleash this sector.

 

 

Materials have a favorable period that runs from the beginning of October through the beginning of May with historical returns of 13.8% over the last 15- year period. Buy SPDR Materials (XLB) with a buy limit of $60.77. Once purchased, set a stop loss of $54.09 and an auto sell of $76.07. Top 5 holdings are: Linde, Air Products & Chemicals, Sherman-Williams, Ecolab and Newmont. Similar to the Industrials sector, Materials have also held up well and could begin to rise at the first sign of improving growth.

 

 

Computer Tech comes into favor in early October and remains so until the beginning of January. This trade has averaged 8.2% and 7.2% 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 $108.06 and employ a stop loss of $96.17. Take profits at the auto sell of $128.61. Top 5 holdings are: Apple, Microsoft, NVIDIA, Visa and Mastercard. Apple and Microsoft combined account for 43.39% of total assets as of October 7 close. 

 

 

Real Estate has seen returns of 8.1% over the last 15 years from the end of October to the beginning of May. Vanguard REIT (VNQ) is our choice. Use a buy limit of $74.96 and a stop loss of $66.71 once a position has been entered. The auto sell is $89.13. Top 5 holdings are: Vanguard Real Estate II Index fund, American Tower, Prologis, Equinix and Crown Castle Intl.

 

 

 

Some positions in the portfolio did weaken since last update. SPDR Gold (GLD) and SPDR Consumer Staples (XLP) edged modestly lower as the U.S. dollar strengthened in September and broad market weakness pulled XLP down. This area of weakness in the portfolio has been offset by renewed strength iShares NASDAQ Biotech (IBB) and SPDR Biotech (XBI). GLD, IBB and XBI are on Hold.

 

iShares Silver (SLV) is currently the sole blemish in the portfolio. Silver historically tends to be more volatile than gold and silver’s recent weakness is in sympathy to gold’s pullback. The Fed and numerous other central banks are suppling substantial amounts of liquidity to the financial system and interest rates are historically low. Inflation appears to be in check now, but that could change as massive monetary and fiscal stimulus continues to flow. 

 

ProShares UltraShort Bloomberg Crude (SCO) was just added to the portfolio today as the buy limit proved to conservative at the beginning of September. Crude oil rallied today due to hurricane threat. Once the threat abates, crude’s price will also likely soften. SCO is a Hold. 

 

 

Following five straight monthly gains, the market finally came under pressure in September. At September’s lows NASDAQ was in correction territory, down over 10%. DJIA and S&P 500 narrowly avoided that threshold. Due to a late-month rally, full-month declines were trimmed significantly. For the month DJIA was down 2.3%, S&P 500 shed 3.9% and NASDAQ declined 5.2%.

 

 

As a result of the end of month rally, our 8-17-19 MACD “Buy” indicators applied to DJIA, S&P 500 and NASDAQ turned positive in September. As of today, our Seasonal MACD Buy Signal is on Hold. 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 satisfied. But do not fear. As we noted in our October Outlook, seasonals are back in style and October’s history of providing ample opportunity is likely on our side.

 

October’s history of volatility was recapped in the October Almanac as well as it being the worst performing month of election years since 1950. In the following chart we have plotted election-year October performance for DJIA, S&P 500, NASDAQ, Russell 1000 and Russell 2000 since 1950 (NASDAQ since 1972 and Russell indexes since 1980) alongside their historical performance excluding gruesome election-year October 2008.

 

 

With or without October 2008, historical performance has been uninspiring in election years. Excluding 2008, October has generally started off on a positive note, but by around the fourth trading day, strength has tended to fade with weakness persisting until around the eighth trading day. Then a modest rally ensued through mid-month followed by more weakness and finally a rally to end the month. Grey shading highlights the two historical windows of weakness that could setup our Seasonal MACD indicators.

 

Going one step further, this next chart is still election-year October performance, but broken out by winning party in November’s Presidential Election. Democrat wins are represented by the solid lines and Republican wins are represented by the dashed lines. Democrats were victorious in 1960, 1964, 1976, 1992, 1996, 2008 and 2012. Republicans won in 1952, 1956, 1968, 1972, 1980, 1984, 1988, 2000, 2004 and 2016. Even when split by the winning party, the overall pattern in October is essentially unchanged. Because of 2008, October’s performance prior to a Democrat win in November is worse.

 

 

With no clear seasonal advantage no matter how October is sliced and diced, the prudent course of action at this time appears to be remaining patient and await the all clear from our Seasonal MACD Indicator. Aside from seasonal factors, the market is still facing election uncertainty, the possibility of a second covid-19 wave as temperatures cool and people head back indoors, an unknown vaccine timeline and persistently elevated unemployment as many areas of the country are still in partial shutdown status.

 

 

In preparation for our upcoming Seasonal MACD Buy Signal, our usual core four ETF positions appear in the portfolio table below. Continue to hold defensive positions in iShares Core US Aggregate Bond (AGG) and Vanguard Total Bond Market (BND). When we issue our Seasonal MACD Buy, we will look to exit AGG and BND and consider establishing positions in DIA, IWM, QQQ and SPY.