Thanks to reader Bruce for asking me to address tax loss selling strategies (both selling and buying) this year. I continue to encourage readers to offer blog topic suggestions on topics that might appeal to a broad audience. This question certainly does- especially given the rather volatile year we’ve seen on the markets.
To start the blog off, I’d like to remind readers that the sideways volatility we have experienced since early 2018 was wholly and entirely expected. I had addressed the probability of such an occurrence via many, many, many blogs last year. In fact, I recently reiterated that it is almost a certainty that you will see a period of sideways contraction after a low volatility year like 2017—here is the blog.
After viewing the chart on the above noted blog, it should be clear as to why we are experiencing this year’s moves — AND—it should convince you that it’s a normal, healthy part of a bull market cycle. Like many of you – I read doomsayers articles, and some of them present convincing technical evidence as to why we may be entering a bear market. I do not heed their “advice”—despite their seemingly convincing evidence (bond yields, Elliott Wave count…yada, yada..). I pay attention to long termed price patterns – and everything I see lines up as pretty normal. Repeat: after low volatility uptrends like 2017, you get consolidations. Please read the blog I refer to above – read it again and study the chart. Our myopic nature sometimes stops us from seeing the forest for the trees.
So…back to Bruce’s question. What opportunities are available for selling out of less healthy looking sectors, and what opportunities are available for buying into undervalued sectors? My thoughts below.
Probable Sell candidates
We don’t want to paint all tech stocks with the same brush. For example, our ValueTrend Equity Platform continues to hold stocks like MSFT and GIB.A due to their continued bullish charts. But many stocks in the sector are hurting. Semiconductors have largely been hammered, as have some of the high profile tech’s like Facebook, who’s chart looks beyond repair. I’d be very selective in this group. The XLK chart shows us that it’s in danger of breaking its long termed trend, although its primary trough has not been cracked at this time. This should prod us to examine the individual names we hold in the sector.
The emerging markets might be currently called the “submerging markets”. If you cannot see on this chart why you should avoid this trade, and sell it if you currently hold it… please go find another hobby.
US Small caps
I wasn’t sure if I should put the small capped stocks into the “buy” or “sell” category on today’s blog. The IWM chart looks similar to that of the technology chart shown above. Its breaking down, but hasn’t yet taken out its primary trough on the weekly chart. Hmmmm…
The small caps should enter into their period of seasonal strength around now, and that strength can often carry forth into March or later. But we need to watch for a break of $145 on this ETF. If that happens, all bets are off, and it’s an outright sell candidate. However, if it holds $145 and bounces higher – it might be an opportunity for an oversold bounce into the spring –as would XLK. Too hard to tell at this point, so I am inclined to wait. It’s going to be a tax-loss seller if it doesn’t start moving soon. Sometimes ya just gotta wait and see what happens. This is one of those times.
While I am aware that gold producers are oversold and may experience a small bounce in the coming weeks, its primary trend is down- as seen via the XGD chart, reprinted from the Nov. 8th blog. To quote my blog from November 8th regarding gold: “This sector has been under pressure for several years. Even during the period from 2017 to current, the trend had been a gentle but undeniable downslope. In other words, gold has been , and remains, the dogs breakfast” I don’t think that seasonal trends (which can be OK from December into the new year) will be enough to bring gold back enough to merit a trade. It’s a tax loss sell candidate.
Possible Buy candidates
The seasonal buy period for Canadian banks is from October until the end of the year. The ZEB chart shows us that $27.75-ish support was successfully tested recently. The sector looks to be a play into the $30 area – possibly into the new year.
As the Canadian banks exit their best seasonal period, the US banks enter theirs. US banks typically perform well from December until the spring. The ZUB chart shows us strong support at $26.50 was momentarily punched in October – but revival happened as the correction righted itself. Resistance comes in at $29, then into the low $30’s. It looks healthy enough to consider as a buy candidate at this point.
I covered the energy sector, along with materials and gold on this blog recently. Energy is the only sector I have any interest in from a technical perspective of the group. Typically, the sector can do well from January into the spring from a seasonal perspective. As noted on the blog, support on the XEG ETF lies at around $10, resistance $13 – per the box it’s been trapped in since 2015. We want to see it supported before buying. Better to buy on a bounce at closer to $10.50-$11. Target would be $13 or thereabouts. If it can hold $10, it looks to be a good buy candidate.
Here’s a link to Brooke Thackray’s report, where he suggests that we may see some rotation into value stocks this winter.
You’ll note that he and I differ on our outlook for gold and small caps. But then again, my trading horizon is usually a bit longer than Brookes. He’s often able to take a quicker move than I can via his role as analyst for the HAC ETF. So perhaps these sectors might give him a bounce that he can play – whereas I am not as agile, given my longer horizon.
Where do lifecos like Manulife line up given how poorly they are performing?
MFC got oversold due to a pretty lame investor lawsuit–as that situation resolves, the stock rallied near its old support ($23). We originally bought it off of that level, so we are not quite break even on it but not brutally down either. My thoughts are that it, and other financials like the banks, may rise into year end–and I will be looking to sell
If you are warm to Energy and are watching the technical, thoughts on the rails (CP, CN, and CSX). I ask about the rails given the increased carry of oil by rail.
The rails are in a nice uptrend, and pullbacks might entice one to buy into the sector.
Keith, thanks for this extensive blog. Here’s my comments/ rebuttals:
I am surprised you are going to rule out XLK and IWM as buys in spite of their strong seasonal tendencies. I am not a big believer in seasonal tendencies – it would be so nice and easy if they worked all the time – I know it is a statistical thing but since everyone talks about it and expects it to work, sometimes, it works. I agree with your MSFT pick – one of the best and continuing to outperform XLK.
I realize that there is the strategy to buy at possible support and sell at possible resistance in a sideways/trading range. There is also the strategy to buy a reversal, which could happen with EEM. Some of the indicators (RSI, SCTR, ADX) are showing bullish divergences. One could put in an order to buy a partial position on a close above recent tops, like 41.05 or 41.70. It there is a breakout above that long term down trend line, one could add to the position. Sometimes the best trades are contrarian b/c those taking the opposite, obvious side are forced to cover/close their positions.
I recall you doing something similar with XGD.TO in a blog ~ February 2016, where you had drawn a long term down trend line and had a price that if it closed above, you would be a buyer. Indeed, that trade had quite a run into the summer of 2016. I wonder if XGD.TO is setting up in a similar way, but it still has quite a way to go before that downtrend line ~ 11.50.
RE: XEG.TO. I have given up on this ETF. I think one is better off trading SU or CNQ, which make up ~ half of this ETF and tend to outperform it since everything else in the ETF just drags down the leaders. Of course, this could change if there is a change in sentiment towards the Canadian energy companies but that is more long term. SU and CNQ are the stocks that general fund managers and foreigners buy if they are going to buy anything in the Canadian energy market. Also, SU and CNQ both have dividend yields over 3%.
I have learned the hard way that selling the Canadian banks is not worth it based on seasonal tendencies. Here I am more selective and only hold TD and BMO. On the U.S. side, I only hold JPM. One of the few edges that a retail investor/trader has is being picky and only owning/trading the best securities.
Great points Paula–thanks for that.
Please not that I do not rule XLK or IWM as buys – I specifically noted that IWM may be a buy, so long as it doesnt punch through $145. to quote the blog regarding both of these sector ETF’s: “(IWM) might be an opportunity for an oversold bounce into the spring –as would XLK. Too hard to tell at this point, so I am inclined to wait”
And yes, trend breaks can change the entire picture from bearish to bullish. That, I believe, is the beauty of Technical Analysis–you can change your view when the picture changes.
My original TA teacher, Ralph Acampora, noted that you must always ask “what is it (the security) doing”. Act accordingly, don’t try to predict beyond that observation.
“THE RALLY TO DATE HAS FAILED TO TAKE THE DOW JONES INDUSTRIAL AVERAGE ($DJIA) AND THE DOW JONES TRANSPORT AVERAGE ($TRAN) TO NEW CLOSING HIGHS; THUS, IF THE DOW JONES INDUSTRIAL AVERAGE WERE TO CLOSE BELOW ITS MARCH 23 CLOSE OF 23,533 (ACTUAL CLOSING IS 25,413), THEN A DOW THEORY PRIMARY BEAR MARKET SIGNAL WILL BE FLASHED.
RALPH ACAMPORA C.M.T. (14/11/2018)
Thanks Keith. I really like how you laid out this blog. You noted energy as a possible buy candidate. In the last 2 months, oil has dropped massively like I haven’t seen in a while – and gone lower than I think most expected. Do you think oil will bounce soon and if yes, would it be corrective and remain in a downtrend? Thank you.
I believe it will be a corrective bounce – actually, there are lots of sectors that may have such a bounce–even my whipping-boy, gold. Its the potential extent of such a bounce that would inspire me to either buy for a trade, or not bother. so oil – methinks – could have a decent bounce–albeit only a bounce–but probably enough to hold a bit of oil in a portfolio for that potential (we don’t have much, but our 5-6% position is enough to give us a piece of that action, should it occur). Gold, on the other hand, may have a bounce – but I’m not convinced it will be enough for anything beyond a short and shallow trade. thus, we continue to avoid that trade.
Thank you Keith – I appreciate your super fast reply. Is there a target price you have in mind for oil if it indeed provides us with a decent bounce?
To your comment of lots of sectors may have bounces…..I suppose we are in a downtrend so long as these sectors have not recovered their weekly 50MA’s? I am trying to trade on the right side of the trend (seems shorting is the right strategy at this point) – as you always say – “the trend is your friend until it ends.”
The 50 day SMA is a shorter trend indicator. I’m more into the 200 day SMA (which has been broken) and peak/trough theory (the last dominant low) to determine trend.
In oil’s case, the producers awere moving in a range that may have just been broken. If so, next support (on XEG) is possibly $9–if it bounces, it may still be worth a trade, but the picture has grown dimmer since I wrote this blog.
Read my book Sideways–you will be able to get a picture of how to formulate a trading system after reading it.