ETF Portfolio Updates: Ride the Rally into Yearend
By: Christopher Mistal
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December 13, 2016
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Tomorrow is the last scheduled Fed meeting of 2016. It is widely anticipated the Fed will do the same thing it did during its last meeting in 2015, raise its lending rate. Based upon the CME Group’s FedWatch Tool, the probability of a hike stands at 95.4%. But, before getting overly concerned, the new range for the rate of 0.5 to 0.75% is still very low by historical standards.
 
In the following chart the 30 trading days before and after the last 70 Fed meetings (back to March 2008) are graphed. There are three lines, “All”, “Up” and “Down.” Up means the S&P 500 finished announcement day with a gain, down it finished with a loss. Down announcement days have generally been the best buying opportunities while up announcement days were often followed by weakness. 
 
Of the last 70 announcement days, the S&P 500 finished the day positive 42 times. Of these 42 positive days S&P 500 was down 24 times (57.1%) the next day with an average loss of .30% across all 42 positive announcement occurrences. Of the 28 days S&P 500 was down on announcement day, the following day was down 16 times (57.1%) with an average loss of 0.38%.
 
[S&P 500 Performance 30 Days Before and After Fed Meeting]
 
ETF Portfolio Updates
 
With limited exceptions, positions in the ETF Portfolio have been performing well in the current market rally. Traditional defensive sectors, like Consumer Staples, Healthcare and Telecom, have lagged. These sectors also tend to be rate sensitive and the Fed’s likely rate increase is most likely contributing. Earlier this month, we unloaded iShares DJ US Telecom (IYZ) at a modest 1.4% gain excluding dividends and any trading fees. We also sold iShares PHLX Semiconductor (SOXX) for just a 1.7% gain. Both IYZ and SOXX seasonally favorable periods ended in early December. Both appeared to be rolling over then, but have recovered since. If not already closed out, current strength could make a better exit point.
 
SPDR Financial (XLF) traded above its Auto-Sell price of $23.53 on December 8 and was sold on that day for a 23.5% gain. XLF appears heavily overbought and stalling out right around current levels. XLF has risen over 20% since two days before Election Day. This is a significant move that may not hold especially if the Fed remains dovish this week. Consider taking profits now if you have not already done so. The financials’ rally has been driven by the prospects of potentially fewer regulations and a steepening yield curve.
 
Big tech was the big winner during the summer, but it has been lagging during the current rally as money moved out of tech into other sectors of the market. Positions like iShares DJ US Tech (IYW), SPDR Technology (XLK) and even PowerShares QQQ (QQQ) are essentially flat over the past month. The NASDAQ 100 index and QQQ did make new intra-day highs today and will likely close at new highs. Should the breakout hold, our tech-related positions, IYW, XLK and QQQ could easily and quickly catch up to the rest of the portfolio.
 
Of the three most recent trade ideas, only iPath Bloomberg Copper (JJC) has been added to the portfolio. JJC was added today at $30 and its return will be calculated when the portfolio is next updated. SPDR Energy (XLE) and Global X Copper Miners can still be considered on dips below their respective buy limits.
 
Although there was scant first-half December weakness this year, the month is still likely to finish well. It is the best S&P 500 month since 1950 and second best for DJIA. Excluding the three most recent trade ideas, all other positions are on Hold. Please see table below for Current Advice and note updated stop losses for many of the positions held. 
 
[Almanac Investor ETF Portfolio – December 12, 2016 Closes]
 
Disclosure Note: At press time, officers of the Hirsch Organization, or accounts they control held positions in FXB, IWM, IYT, JJC, QQQ, SPY, VNQ, XLB, XLF, XLP, XLV and XLY.