Our near-term view is that the market is likely to endure some additional weakness during the balance of the third quarter and possibly into early Q4 before rallying again to finish the year, explains seasonal trading specialist Jeff Hirsch, editor of Stock Trader's Almanac.
Although two new bullish sector trades begin in August, we are going to take a cautious approach consistent with this short-term view. As such, new long trade ideas are suggested on dips.
The biotechnology sector enters its historical favorable season in August. iShares Biotech (IBB) could be considered on dips below a buy limit of $123.50. A stop at $119.90 is suggested.
The auto-sell price is $154.97 based upon historical average performance. A 17.5% average gain has occurred over the last 25 years while an average gain of 8.5% has occurred in the most recent 5 years.
Top five holdings are: Vertex Pharmaceuticals (VRTX), Amgen (AMGN), Gilead Sciences (GILD), Regeneron Pharmaceuticals (REGN), and IQVIA Holdings (IQV).
SPDR S&P Biotech (XBI) can also be considered on dips below $77.50. XBI’s top five holdings include: BridgeBio Pharma (BBIO), Revolution Medicines (RVMD), Halozyme Therapeutics (HALO), ACADIA Pharmaceuticals (ACAD), and Catalyst Pharmaceuticals (CPRX).
Compared to IBB, XBI’s holdings tend to be small-cap, growth-orientated holdings. Due to this XBI can exhibit more volatility compared to IBB.
Over the last 25 years, Info-Tech has generated an average return of 11.9%, and for the last five years the average has been a solid 13.6% during its bullish season from mid-August to mid-January. Our top ETF within this sector is iShares DJ US Technology (IYW). Set a buy limit of $101.50 and an initial stop loss of $93.53 if purchased.
Should Info-Tech produce above average gains, profits can be taken at the auto-sell price of $136.29. IYW’s top five holdings are: Apple (AAPL), Microsoft (MSFT), Alphabet Class A & C shares (GOOGL, GOOG), Nvidia (NVDA), and Meta Platforms (META). These five holdings represent 53.22% of IYW’s total holdings.
August’s final new trade idea is a short trade in the Semiconductor sector. Over the past 25 years the Semiconductor Index (SOX) has declined on average 7.7% from the middle of August through the end of October. More recently, over the last five years this trade has not been all that successful with an average 0.1% gain.
AI expectations have fueled the sector substantially higher, but consumer-based product demand like PCs and smartphones appears to be slumping. A disappointing forecast from Qualcomm (QCOM) could be just the beginning of broader sector weakness.
We are going to avoid using a leveraged, inverse ETF and instead consider establishing a short position in iShares Semiconductor (SOXX) on a breakdown below $498.96. If shorted on a breakdown set an initial stop loss at $523.91.
Top five holdings of SOXX are: Nvidia (NVDA), Broadcom (AVGO), Advanced Micro Devices (AMD), Intel (INTC), and Texas Instruments (TXN).
