Bear Bets: 4 Seasonal Trades

05/11/2015 9:00 am EST

Focus: ETFs

Jeffrey Hirsch

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

Last week, we issued our Seasonal MACD Sell Signals for the Dow Industrial average and the S&P 500, explains seasonal timing expert Jeffrey Hirsh, editor of Stock Trader's Almanac.

Four sectors begin seasonally weak periods in May: Banking, Cyclical, Gold & Silver (stocks), and Materials. Over the past 15 years, all four sectors have declined on average 6.6 to 8.0%, which sets them up as good short trade candidates during the summer and early fall months.

Typically, we like to take advantage of sector weakness through the use of inverse or bearish sectors. By doing so, the trade is similar to any other long trade that we choose to execute.

One of the drawbacks of inverse ETFs is they frequently employ leverage and only track the daily performance of the underlying benchmark.

As holding periods get longer, these types of funds often exhibit performance that differs significantly than expected due to compounding and tracking error.

Three out of today’s four new trade ideas are going to be short trades. Only in the case of Gold & Silver will we use a leveraged inverse fund as its seasonally weak period is only about six weeks long.

SPDR Financial (XLF) could be shorted at $24.80 as it is currently struggling to break through projected monthly resistance.

Look for a corresponding MACD Sell signal accompanied by a rollover of its Stochastic and relative strength indicators.

Should XLF suddenly breakdown and not reach $24.80, short it at $23.85 as it will have broken support. Set an initial stop loss at $25.50 and take profits at $20.53.

iShares DJ Transports (IYT) could be shorted on a rally toward resistance near $158.84 or on a break down below $152.02. Stochastic, MACD, and relative strength are all currently weak.

IYT could easily bounce or just fall apart. Watch crude oil’s price for an early indication of which way it may be. The initial stop loss is $167.80 while profits can be taken at $133.52.

Direxion Daily Jr Gold Miners Bear 3X (JDST) can be bought on dips below $7.25. JDST is volatile due to its 3x leverage and traded as low as $7.04 on April 29 to a high of $8.71 on May 1.

Odds are it will flirt with or trade below our buy limit before its next move. Set a stop loss at $6.31 and consider taking profits on any pop above $8.61.

SPDR Materials (XLB) could be shorted on a rally back toward resistance near $51.50 or on a break down through support right around $49.01.

After a solid rally from late March till now, it’s Stochastic, MACD, and relative strength indicators are beginning to turn as a result of recent weakness. A stop loss at $52.20 is suggested and profits can be taken at $42.78.

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