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Ride Seasonal Gains with These 11 ETFs

09/20/2011 7:00 am EST

Focus: ETFS

Jeffrey Hirsch

Editor-in-Chief, The Stock Trader's Almanac and Almanac Investor

October tends to kick off a season of strong market gains, says Jeffrey Hirsch of StockTrader’s Almanac. He tells about his top ETF picks to take advantage of sector strength, and talks about historical trends that could guide your entry and exits into these funds. September can offer some early entry points, so his advice couldn’t be more timely.

Kate Stalter: Today I’m on the phone with Jeffrey Hirsch. He’s the editor-in-chief of Stock Trader’s Almanac, and he has also been a market analyst and a market historian. He has a great view of stocks that investors may want to take a look at. So, Jeff, give us your take on the current market.

Jeffrey Hirsch: Well, we’re in a tight little range that I’m concerned about. I have a little bit of a support level at about Dow 10,800 and 11,600 on the resistance end. So, you know, we could go either way.

I’m actually thinking there’s a little bit more risk for the downside right here. That’s my concern.

But what that does is provide us with a nice buying opportunity, coming into the seasonal sweet spot of October. In addition to just the broad market, there are several stocks, sectors, and indexes that we like, that come into their bullish season right around this time.

Kate Stalter: So, what are some of those that you believe are showing some potential right now?

Jeffrey Hirsch: We’re looking to get some of these on dips. We have recommended to our subscribers to buy these sector ETFs at lower prices, looking for the pullback. It’s right out of the updated table of sector-index seasonalities in the Stock Trader’s Almanac 2012, which is coming out next month also.

So, the transports come into their favorable season at the beginning of October and run until May. A pretty solid performance over the years of about 20% over the last 15 years, 18% over the last 10, and 15% over the last five. So it’s held up well, that seasonality, over the past several years.

Broker-dealers also come into play right now. They’ve gotten a little banged up over the last five years, with only a 2.3% gain, but over the long haul it’s a 15-year average of almost 30%.

The next sector that we have seasonality beginning in October is the health-care providers. Again, the ETFs, like the iShares Dow Jones US Healthcare Providers Index Fund (IHF).

I forgot to mention, but the broker-dealer ETF we like is the iShares Dow Jones US Broker-Dealers Index Fund (IAI), and for the transports it’s the Dow Jones Transportation Average Index Fund (IYT), the Dow transports.

Pharmaceuticals also come into play, with iShares again. There, the preferred selection for us to trade that is the Dow Jones US Pharmaceuticals Index Fund (IHE).

For telecom, the Dow Jones US Telecommunications Sector Index Fund (IYZ). We really find that the iShares provide liquidity, volume, and decent cost basis there.

The industrial sector comes into play. That kind of runs with the Dow and S&P also. They come into their best six months in October. So, the Industrial Select Sector SPDR Fund (XLI) is our pick there.

Banking—believe it or not—even though you’ve got a lot of trouble there recently, it still does well, beginning in October and running through June. We like the SPDR KBW Bank ETF (KBE).

Materials also comes in. It’s pretty much the best buying time of the year, October, for stocks, and most sectors come into play right around this time. So, we’re looking to get these at lower prices. For the materials, we like the Materials Select Sector SPDR Fund (XLB).

Semiconductors also, the SPDR S&P Semiconductor ETF (XSB), which tracks, pretty much, the SOX index. The Technology Select Sector SPDR Fund (XLK), and even the REITs show a nice seasonality running from the end of October through July.

It’s been a little bit tougher in recent years, with the 15-year average of 14% gain over that timeframe, versus 4.7% over the last five years. The Vanguard REIT ETF (VNQ) is the selection there.

So, we provide several different buy limits for all these, and when we hit them, they’ll be added to our portfolio. But, when we do get the best six-month MACD buy signal for the broad market on the S&P, the Dow, and the Nasdaq, and any of these have not hit our buy limits, we often go ahead and add them at that time, when the market shows its seasonal and technical strength at the same time.


Kate Stalter: Within all of these sectors that you’ve named, Jeff—and that’s a great perspective of the market—are there and individual stocks that people should look at, or do you really recommend sticking with the ETFs and the REITs?

Jeffrey Hirsch: Well, for this sector seasonality trading, we recommend sticking with the sector ETFs.

Individual stocks, that’s another ballgame for me. I gravitate toward the undervalued and smaller-capitalized stock, which is where we’ve done best over the years. We look at low price-to-sales ratios, low prices. We’re talking about under $1 billion and sometimes even $500 million, so the kinds of stocks that I like to get an edge with are not the kinds that are in the big, broad sector ETFs.

Kate Stalter: Coming back to your theme of seasonality: what sectors should investors avoid now, Jeff, going into the fourth quarter?

Jeffrey Hirsch: Well, there’s really not a whole lot of sectors to be out of. Most of them are really hitting their stride, and it’s just a time when there’s not a lot of shorts in the fourth quarter.

But in the short term, oil tends to fade off a little bit after the hurricane season passes, and we’ve already seen oil come down. We’re looking for a little bit of a rally here in September, which we’ve gotten some pushup in oil a little bit to go short that.

So, it’s not something that we really find a lot of negative sectors in this period. That’s why it’s the best six months for most stocks. But I guess if you really had to look for something to go negative, it might be oil on a rally to about $90 is what we’re looking at.

Kate Stalter: Now, overall, what would you advise that investors adopt as a strategy going into the last few months of the year? You’ve named some sectors, but kind of taking the 30,000-foot view, looking at one’s overall portfolio?

Jeffrey Hirsch: September, October have been the best times to buy over the years. Any sort of break of that support that I mentioned before could get us down to about 10,000. That’s the basic mantra of our strategy: Look for September and October weakness to get long and play that year-end rally.

We’ve been firing on the seasonal rhythms since two years ago. In September 2009, we started to get back into that historical seasonal behavior, so that’s the general theme—looking for buying opportunities, having your list—your screens, your stocks that you’re looking to get at good prices—ready, and jumping on it when you see a pullback there in late September.

The week after triple witching in September has been notoriously negative. That’s a good time to look at that, and also late October is a great time to buy. Tech stocks, small-cap stocks, and pretty much all stocks when they sort of sell off a little bit.

Kate Stalter: Any cautionary notes heading into the new year, how January can work out for investors?

Jeffrey Hirsch: Well, we’ve seen the January effect start earlier. Our research in the Almanac shows that most of the January effect, where small-cap stocks outperformed large caps, happened the last two weeks of December.

January is historically a strong month. We had a couple of rough Januarys recently, but I think if you’re short-term oriented, you want to use some of that December/January strength to take some profits on the things that you accumulated or had gotten into in the late summer, early fall period.

You can also get back in again in February, when we tend to have a pullback. Or if you have a longer-term outlook, you sort of ride that through and take it into the spring, where over the past couple years we’ve seen that “sell in May” situation occur. Our best six months have been working very well in the November to April period.

So, those are the things you want to have in your mind as the year turns over. You’re looking for continued strength in January again. Our January barometer, which is, “as January goes, so goes the year.”

If you see weakness in January, it’s not a great sign for the market. You’ll usually find lower prices later in that year, either a 10% correction or a bear market, or something like that.

So, you want to be alert to the performance in January to use the strength, take some profits, and also as a sign of continued strength going forward with the stock market.

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