Managing Editor’s Note: Today, we’re hearing from our contributing editor Mike Burnick in his weekly Thursday feature.
Mike has over 30 years in the investment and financial services industry – from operating as a stockbroker, trader, and research analyst, to running a mutual fund as a registered investment advisor and portfolio manager, to being Research Director for the Sovereign Society, specializing in global ETF and options investing.
And he’s been senior analyst at TradeSmith for three years, running Constant Cash Flow, Infinite Income Loop, and Inside TradeSmith.
Here’s Mike…
These Sectors Look Set for a Seasonal Drop
BY MIKE BURNICK, CONTRIBUTING EDITOR, MARKET MINUTE
Most investors know that stock market seasonality turns negative at this time of year.
The months of August and September in fact are the only two months of the year with negative average returns for the S&P 500 over the past 35 years.
But certain market sectors perform even worse during this seasonal slump. And several look perfectly set up right now for this drop…
Let’s take a closer look.
Gold stocks, as measured by the Van Eck Gold Miners ETF (GDX) shown below, have a bearish seasonal window that started last week (July 24) and runs through October 3.
Over the past 19 years, this ETF has suffered an annualized drop of -19.96% during this period, according to our TradeSmith Seasonality indicators.
And gold isn’t the only top-heavy metal set up for a potential drop…
Copper and the Global X Copper Miners ETF (COPX) plus the SPDR Materials Sector ETF (XLB) also have a seasonal tendency to decline from the end of July into October.
It’s also worth noting that all three ETFs are coming off overbought levels recently. That’s especially true of COPX and XLB. Both ETFs have Relative Strength Index (RSI) readings that crossed down from above 70 this month, a classic technical analysis sell signal.
And other market sectors appear set up for an even bigger seasonal fall…
Retail investor speculation is off the charts right now. And there is perhaps no sector that looks more speculative than unprofitable “junk” stocks.
Vegas casinos offer you better odds of winning than many of these junk stocks.
And a great proxy for junk stocks is the ARK Innovation ETF (ARKK) which is chock full of money-losing stocks and others with negligible net income and sky-high valuations.
To paraphrase American actress and singer Mae West, “when ARKK is good, it’s very good, but when it’s bad… it’s ugly.”
The ETF has seen spectacular gains, including being up over 90% since the April low. But ARKK has also suffered stunning losses, like dropping 75% in 2022.
And right now, it may be setting up for another steep drawdown…
As you can see above, ARKK seasonality turned negative on July 20, and the seasonal downtrend typically runs through October 22… two months of potential pain.
During this seasonal bearish window, ARKK has posted annualized losses of -20.77% over the last 11 years of its existence, according to TradeSmith stats.
Bottom line: If you are looking for some hedge trades during this seasonally weak period of the year for stocks, look no further than GDX, COPX, XLB and ARKK. All four offer liquid put options to wager on a replay of the historically bearish seasonal patterns coming up for these sectors.
Good investing,
Mike Burnick
Contributing Editor, Market Minute